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, silver and diamonds 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 a goods and services that were previously unprofitable.
Debt monetization is the conversion of government debt into money. The government essentially sells bonds to itself, the Federal Reserve buys them in the United States, but pays for the bonds by printing additional currency or just increasing a bank balance. If a government needs or wants to spend more money than it takes in, such as during a war, debt monetization is one way to do it. It prevents the government from competing with businesses for private capital. There are a limited amount of funds available for borrowing and if the government takes a substantial portion of them, there will be less funds for businesses and interest rates will increase. Unfortunately, debt monetization causes inflation because it artificially increases the money supply. It can be seen as a tax on those who hold money because the government acquires additional funds while currency decreases in value. However, monetization can be good because it helps the government out of debt at the beginning.
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