RISING COST OF LIVING: THE ROLE OF FIAT MONEY AND MONEY CREATION

Abstract

The increasing cost of living remains the leading cause of concern for a sizeable segment of the public. Governments around the world increase money supply in economic circulation in a bid to induce economic productivity that would later be translated into higher net economic worth. In the absence of real asset backing, the additional fiat money supplied would only put more pressure for inflation to rise. This paper attempts to expound that the increase in the cost of living is instigated by the excess creation of fiat money by banks with no existent asset backing in the present day monetary system and would not bring about corresponding increase in economic output. Utilising the secondary data starting from 1990, it examines the trend of three Southeast Asia countries specifically Malaysia, Thailand and Singapore. This paper dichotomizes the ‘Equation of Exchange’ (MV =PY) to account for the current phenomenon and substantiate that excess of fiat money is responsible for the high cost of living and disproportionate increase in the real economy output. In conclusion, our findings support the argument that the increase in money supply without asset backing is disconnected to the real economic growth and causing the cost of living to soar and perpetually puts pressure for the currency to be devalued which is decremental to the development of a country.