The process by which a central bank creates new money to purchase government debt, financing fiscal deficits with printed money rather than market borrowing — with distinct implications for inflation, currency, and real asset prices.
“When debts can no longer be paid, there are only a few ways out. Austerity is painful and deflationary. Restructuring is disruptive. Monetisation is the path most governments choose because it spreads the pain invisibly across everyone who holds the currency. — Ray Dalio”
— Ray Dalio
Deeper Explanation
Debt monetisation occurs when a government runs large fiscal deficits and the central bank purchases the resulting government securities with newly created money, rather than allowing the open market to absorb them at higher interest rates. The mechanism: government issues bonds → central bank creates new base money to buy those bonds → money supply expands without a corresponding increase in productive output. If the new money enters the real economy (through government spending), inflation typically follows. Ray Dalio's 'beautiful deleveraging' framework holds that controlled monetisation — calibrated so nominal GDP growth exceeds the interest rate on existing debt — can reduce debt burdens without triggering deflation or depression. This is the tightrope: too little monetisation causes deflationary deleveraging; too much causes currency debasement and eventually hyperinflation. For equity investors, the actionable implications are specific: periods of heavy monetisation (globally in 2020–2021) are associated with rising nominal asset prices broadly, commodity price acceleration, underperformance of long-duration fixed income, and outperformance of real assets including gold, real estate, and commodity producers. The critical distinction is between nominal returns (inflated by monetary expansion) and real returns (adjusted for the inflation that monetisation generates).
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