Monetization

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Monetization is the process of converting or establishing something into legal tender. It usually refers to the printing of banknotes by central banks, but things such as gold, diamonds and emeralds, and art can also be monetized. Even intrinsically worthless items can be made into money, as long as they are difficult to make or acquire. Monetization may also refer to exchanging securities for currency, selling a possession, charging for something that used to be free or making money on goods or services that were previously unprofitable.

Monetizing The Debt

In the United States, and in many other countries, the government does not have the right to issue currency to pay its bills. In this case the government must finance its deficit by issuing bonds to the public to acquire the additional funds to pay its bills. However, if these bonds do not end up in the hands of the public, the only alternative is for them to be purchased by the central bank. For the bonds not to end up in the public hands the central bank must conduct an open market purchase. This action by the central bank increases the monetary base, through the money creation process. This process of financing government spending is called monetizing the debt.^[1] Monetizing debt is a two step process where the government issues debt to finance its spending, the central bank purchases the debt from the public, and the public is left with high powered money. When government deficits are financed through this method of debt monetization the outcome is an increase in the monetary base, or the money supply. If a budget deficit persists for a substantial period of time, then the monetary base will also increase, shifting the aggregate demand curve to the right leading to a rise in the price level.^[2]

To summarize: a deficit can be the source of sustained inflation only if it is persistent rather than temporary and if the government finances it by creating money, {through monetizing the debt}, rather than leaving bonds in the hands of the public.^[3]

Google and watch "Money as Debt" to get a better understanding of how this process works.

Revenue from business operations

In some industry sectors, monetization is a buzzword for adapting non-revenue-generating assets to generate revenue. Failure to monetize web sites was a problem that caused many businesses to fold during the dot-com bust. Web sites that do generate revenue are often monetized via advertisements or subscription fees.

Monetization of non-monetary benefits

Monetization is also used to refer to the process of converting some benefit received in non-monetary form (such as milk) into a monetary payment. The term is used in social welfare reform when converting in-kind payments (such as food stamps or other free benefits) into some "equivalent" cash payment. From the point of view of economics and efficiency, it is usually considered better to give someone a monetary equivalent of some benefit (say, a litre of milk) than the benefit in kind.

• Inefficiency: in the latter situation people who may not need milk cannot get something of equivalent value (without subsequently trading or selling the milk).

• Black market growth: people who need something other than milk may sell it. In many circumstances, this action may be illegal and considered fraudulent. For example, Moscow pensioners (see below for details) often give their personal cards that allow free usage of local transport to relatives who use public transport more frequently.

• Changes on the market: supply of milk to the market is reduced by the amount distributed to the privileged group, so the price and availability of milk may change.

• Corruption: firms that should give this benefit have an advantage as they have guaranteed consumers and the quality of the goods supplied is controlled only administratively, not by market competition. So, bribes to the body that choose such firms and/or maintain control can take place.

Environmental Monetization

The process of development, or exploitation of the resources of any area of land, or water, often accruing to the benefit of a limited number of people, and the damage to the exploited environment. This leads to using up resources faster than they can be replaced. In 2008, the World Wildlife Fund estimated that the human species is using up natural resources at a rate 1/3 faster than they can be replaced. ^[4].

Russian social welfare monetization of 2005

In 2005 Russia transformed most of its in-kind benefits into monetary compensation.

Before this reform there were a large system of preferences: free/reduced price of travels on local transport, free supply of drugs, free health resort treatment, etc. for diverse categories of society: military personnel, the disabled, and separately, persons disabled due to WWII, Chernobyl disaster "liquidators," inhabitants of Leningard during the siege, former political prisoners, and just for all pensioners (women 55+, men 60+). This system was a legacy of Soviet Union, but it was heavily extended by populist laws of central and regional authorities during 90s.

By the law 122-ФЗ of 22 August 2004 this system was converted into cash payments by various means:

• abolition of preference, compensated by raising of wage (e.g. free use of local transport for military personnel) or pension (e.g. different preferences for Chernobyl liquidators)
• for three most important preferences (free local transport, 50%-price suburban rail transport, free supply of drugs): a choice between this preference and some extra money.

The main causes of friction in the reform were the following:

• technical and bureaucratic problems (e.g. for usage of 50% discount for suburban rail transport a person should present a paper from local State Pension Fund office stating that he/she doesn't choose monetary compensation);
• separation of all preference-recipients into federal and regional accordingly to the body issuing a preference legislation. The largest group, that is pensioners, was regional. It was the main cause of problems:
  • In poor regions local government had to abolish these preferences with small or zero compensation.
  • Even if these preferences were retained, they could apply only to pensioners of this region, so, e.g. Moscow Oblast pensioners can't use Moscow metro and buses freely. (Later these problems would be generally solved by a series of bi-lateral agreements between neighbouring regions.)

The wave of protests emerged in various parts of Russia in the beginning of 2005 as this law started to work. But government measures (raising of compensations, normalisation of bureaucratic mechanisms, etc.) eventually neutralized opposition.

The long-term effects of the monetization reform varied for various groups. Some people received compensation in excess of the services they received (e.g. in rural areas without any local transport, the free transport benefit was of little value), some have found that the compensation is insufficient to cover the cost of the benefits needed. Transport companies and railroad have obvious benefits from monetization as they receive higher cash receipts when these categories use their services (previously in some regions more than a half of passengers did not pay for municipal transport, without sufficient compensation to the companies from the government). Effects on medical system are controversial. Doctors and nurses have to use their time to fill in many forms to justify free receipts, thus reducing time spent on services.

References

1. ^ The Economics of Money, Banking, and the Financial Markets 7ed, Frederic S. Mishkin
2. ^ The Economics of Money, Banking, and the Financial Markets 7ed, Mishkin
3. ^ The Economics of Money, Banking, and the Financial Markets 7ed, Mishkin
4. ^ "Living Planet Report 2008". World Wildlife Fund. http://assets.panda.org/downloads/living_planet_report_2008.pdf. Retrieved on 2009-03-22. 

• Monetizing the Debt

See also

• Remonetisation
• Demonetisation