Question: What does "monetisation of debt" mean?

Answer: "Monetisation of debt" is just a fancy phrase that means "creating money out of a debt". This is the mechanism that is used by the banking system to effectively create money via book entries. In order to confuse people even more - the Federal Reserve Bank in the USA created a new phrase "Quantitative Easing". However both these phrases mean the same thing - "creating new money based of the promise of someone to repay that very same money".

Answer: Fractional reserve lending was a phrase that was more relevant in the past when paper money (e.g. a gold certificate) could be exchanged at a bank for a real gold coin. As currencies left the gold standard (i.e. they could no longer be converted into gold on demand) the practise continued only in the sense that it restricted how much new money a bank could create - based on existing deposits by customers.

As banking was deregulated worldwide, banks pushed for this ratio (e.g. 10%) to be reduced, since it was considered to be a "drag" on the ability of banks to expand their business. What is important to understand is that this is NOT the mechanism whereby banks create money ("monetisation of debt" is the actual mechanism of creating money) - but that fractional reserve lending is only a measure that restricts how much money a bank can create. For example, a 0% reserve requirement means that a bank can create as much money as it wants, while a 100% reserve requirement means that a bank cannot create any money and can only lend out what has been deposited.

Question: What does "capital adequacy" mean?

Answer: Capital adequacy is similar to "fractional reserve lending" in that it is a measure that restricts how much a bank can lend, or rather how much "debt it can monetise". Capital adequacy requirements are set out in the various Basel Accords (drafted under the supervision of the Bank of International Settlements), and these requirements set lending limits based on the amount of capital that the bank has on its balance sheet.

What is important to understand is that banks create money by "monetising debt"- and that there are 2 measures that restrict them as to how much money they can create, namely "capital adequacy" and "fractional reserve lending". Capital adequacy limits money creation by measuring the existing capital in the bank, while fractional reserve lending limits money creation by measuring the deposits in the bank.

Question: Does the term "inflation" mean an increase in the money supply or an increase in prices?

Answer: Economists and market commentators use the single term "inflation" to mean either one - depending on the context of their argument. It is best to always ask: Do you mean "monetary inflation" (an increase in the money supply), or "price inflation" (a general increase on prices)?

Of interest is that monetary inflation will (with everything else held constant) result in price inflation in the future (normally between 6 month to 18 months).

Question: How does deflation, inflation and hyperinflation relate to each other?

Answer: Firstly - one has to determine if the speaker means monetary inflation or price inflation. Generally, such a question relates to price inflation. Having determined that - "deflation" is a general decrease in the price of goods and services; "inflation" is a general increase in the price of goods and services, while "hyperinflation" means the total loss of confidence in the currency where people just want to get rid of their paper money in exchange for any physical asset they can get their hands on. "Hyperinflation" does not mean inflation on steroids - which is a common mistake.