Why Isn’t Gold Acting Like a Safe Haven—Yet? War, Liquidity Stress, and the Fracturing of the Bullion System (Part I)

 

Nations have scoured the earth for gold in order to control others only to find that gold has controlled their own fate. The gold at the end of the rainbow is ultimate happiness, but the gold at the bottom of the mine emerges from hell. Gold has inspired some of humanity's greatest achievements and provoked some of its worst crimes. When we use gold to symbolize eternity, it elevates people to greater dignity—royalty, religion, formality; when gold is regarded as life everlasting, it drives people to death—Peter L. Bernstein 

In this issue

Why Isn’t Gold Acting Like a Safe Haven—Yet? War, Liquidity Stress, and the Fracturing of the Bullion System (Part I)

I. The Muted Signal

II. Two Gold Markets

III. The Clearing Infrastructure

IV. When Logistics Stress Becomes Financial Stress

V. The Collateral Squeeze

VI. The Dollar as Lightning Rod

VII. Fragmentation, Not Failure

VIII. What the Quiet Is Actually Saying

VIIIA. Post Script: "There is No Haven" 

Why Isn’t Gold Acting Like a Safe Haven—Yet? War, Liquidity Stress, and the Fracturing of the Bullion System (Part I) 

Oil is surging, the dollar is rising—and gold isn’t responding. The explanation lies in liquidity stress, collateral dynamics, and the plumbing of the global bullion system.

I. The Muted Signal 

Long regarded as a safe haven, gold is expected to shine in times of crisis—particularly amid geopolitical shocks such as the escalating tensions surrounding the U.S.–Israel–Iran conflict.

Yet as instability deepens in the Middle East, a curious divergence has emerged. Oil prices have surged, and the U.S. dollar has strengthened, but gold has remained conspicuously subdued. 

For many observers, this raises an uncomfortable question: has gold lost its safe-haven status? 

The answer is almost certainly no. What we are witnessing instead is a familiar—but often misunderstood—dynamic in times of financial stress. Gold does not operate within a single, unified market responding to a single force. Rather, it exists at the intersection of multiple systems—monetary, financial, and physical—each reacting differently under pressure. 

To understand gold’s apparent silence today, one must move beyond the simplistic safe-haven narrative and examine the underlying mechanics of how crises actually unfold. 

II. Two Gold Markets 

Gold is not a single market. It is two markets operating simultaneously. 

The financial layer consists of futures traded on COMEX, forward contracts cleared through the London bullion system, and gold ETFs. Prices here move primarily in response to macro variables: the dollar, real interest rates, and shifts in global risk sentiment.

Figure 1

The resurgence in global gold ETF flows early in the year highlights the responsiveness of this financial layer to momentum, liquidity, and broader macroeconomic signals. (Figure 1, upper chart)

Unlike physical markets, positioning here can expand rapidly and at scale, without the need for underlying physical settlement, largely unconstrained by the frictions of moving and storing metal. Yet this flexibility stands in contrast to the more constrained and regionally fragmented nature of physical gold markets—a divergence that becomes evident when comparing pricing across Shanghai and London. 

The physical layer operates very differently. It consists of doré bars produced by mines, bullion refined in Switzerland, jewelry demand across Asia, and steady accumulation by central banks. This layer depends on transportation networks, refinery throughput, vault logistics, and customs clearance. 

Even at the level of demand, gold is not unified. As shown by the World Gold Council, demand is structurally divided across investment, jewelry, and industrial uses—each driven by distinct economic forces and time horizons. (Figure 1, lower graph) 

Figure 2

Rather than moving in lockstep, Shanghai and LBMA pricing in early 2026 oscillated between premium and discount. This back-and-forth reflects a market where arbitrage is active but not seamless—revealing, in practice, the dual structure of gold as both a financial asset and a physical commodity. (Figure 2) 

Under normal conditions, arbitrage keeps these two layers aligned. When physical premiums emerge in Asia or the Middle East, traders move gold to capture the spread, transmitting local signals back into global benchmarks. But when logistics slow or uncertainty rises, that alignment weakens. Physical markets may tighten even as financial benchmarks remain anchored to macro forces. 

III. The Clearing Infrastructure 

The global bullion system relies on a relatively concentrated infrastructure. 

London dominates price discovery through the clearing system associated with the London bullion market, while Switzerland refines a large share of the world’s doré into internationally tradable bars. Logistics hubs in the Gulf, in turn, connect African supply with major consumer markets in Asia. 

This network typically functions smoothly because gold flows continuously between these nodes. 

Figure 3

In effect, the bullion system operates as a hub-and-spoke network: Switzerland serves as a dominant refining center processing a substantial share of global supply, while London anchors pricing and clearing. This concentration enhances efficiency, but also creates critical points of vulnerability. 

When transport routes are disrupted or regional stability deteriorates, those vulnerabilities become visible. 

Geopolitical tensions in the Middle East have begun to complicate these flows. Even partial restrictions on cargo routes or airspace can slow the movement of metal between mining regions, refineries, and end markets. 

In a system where arbitrage depends on the physical movement of bullion, even modest friction does not simply delay flows—it weakens the transmission of price signals between markets. 

IV. When Logistics Stress Becomes Financial Stress 

Disruptions in the physical gold market rarely remain isolated. 

When the movement of metal becomes uncertain, arbitrage trades that normally link markets turn riskier. Traders who once relied on seamless transfer between regions suddenly face basis risk, as the cost and timing of moving bullion becomes unpredictable. 

Clearinghouses respond in the only way they can: by demanding additional collateral. Margin calls follow. 

To meet these calls, participants often liquidate the most liquid assets available—typically dollar-denominated instruments. 

What begins as a logistical friction in the physical market thus propagates into the financial system, triggering a collateral-driven tightening that can ripple across broader markets. 

Disruptions in the physical market do not remain isolated. 

V. The Collateral Squeeze 

Gold occupies a unique position in global finance. It is simultaneously a commodity, a reserve asset, and a form of high-quality collateral used across derivatives, repo agreements, and bullion banking. During periods of market stress, this collateral role can temporarily dominate its safe-haven function. 

Three mechanisms typically drive this dynamic: 

• Forced liquidation. Institutions facing margin calls sell the most liquid assets available. Gold is often among the first assets sold—not because confidence in it has vanished, but because it can quickly raise cash. 
• Haircut widening. When volatility rises, clearinghouses increase the discount applied to gold posted as collateral. Positions that were previously adequately margined can suddenly require additional coverage, forcing further liquidation 
• Tightening in the gold lending market. Bullion banks regularly lend gold through swaps and leases. Under stress, these channels can constrict as counterparties become more cautious. 

A current illustration of these dynamics comes from Dubai. Recent reports show that shipments of gold have been delayed due to regional logistical bottlenecks, rising insurance premiums, and higher financing costs amid Middle East tensions. 

Physical gold that is stuck or delayed can be sold locally—often at a discount—to meet liquidity needs even while global confidence in gold remains intact. This episode demonstrates how frictions in the physical market can amplify financial pressures, turning bullion into a source of immediate cash rather than a stable safe-haven. 

These collateral-driven dynamics are not unprecedented. Similar patterns emerged during the global financial crisis, the European sovereign debt crisis, and the market dislocations of 2020. In each case, gold initially weakened during the liquidity phase of the shock before later reasserting its safe-haven role. 

Financial instability theorist Hyman Minsky argued that crises often begin with a scramble for liquidity, forcing investors to sell even high-quality assets to meet obligations. Gold’s early weakness during crises—including today’s Dubai example—fits squarely within this pattern. 

VI. The Dollar as Lightning Rod 

A common explanation for gold’s weakness is that investors fled into U.S. Treasuries, strengthening the dollar.

Figure 4

The broader market picture suggests something different. Bond markets have not been rallying strongly. To the contrary, yields across many sovereign markets have risen as investors reassess inflation risk and fiscal sustainability following the oil shock. (Figure 4, upper image) 

The dollar’s strength reflects another mechanism. The global financial system is largely funded in dollars. (Figure 4, lower diagram) 

When volatility rises and leveraged positions unwind, institutions need dollars to meet margin calls and settle obligations. 

Capital flows into the dollar not necessarily because it is safe, but because it is required. The dollar therefore acts less like a haven and more like a lightning rod for global liquidity stress. 

Recent market behavior reinforces this dynamic. Episodes of rising dollar demand have coincided with sharp declines in gold prices and tightening cross-currency funding conditions—an indication that global markets are paying a premium to access dollars. 

These moves suggest that what appears to be gold weakness is in fact a symptom of a broader liquidity squeeze, in which institutions sell liquid assets to obtain dollars needed to meet obligations. 

Figure 5 

Historical patterns support this interpretation. Gold has often declined during the initial phase of major financial stress events, including the global financial crisis and the pandemic shock, before rallying as liquidity conditions stabilize. (Figure 5) 

Even gold can be temporarily liquidated in this environment, illustrating how financial liquidity dynamics can dominate its intrinsic safe-haven appeal. 

VII. Fragmentation, Not Failure

Figure 6 

Another structural trend may be shaping gold’s muted response. 

Central banks continue to accumulate gold, extending a multi-year pattern of reserve diversification, although the pace of purchases has moderated in recent months. (Figure 6) 

This suggests that while the strategic bid for gold remains intact, accumulation is becoming more measured—less urgent, more sensitive to price and liquidity conditions. 

At the same time, new trading corridors have gradually developed outside the traditional Western clearing system. Asian markets frequently trade at premiums to London, while regional demand and policy dynamics increasingly influence the movement and pricing of physical gold. 

Taken together, these developments point to a gradual shift toward a more multipolar bullion market. Disruptions to established logistics routes may accelerate this transition, encouraging alternative trading channels and settlement infrastructure. 

This signal that the architecture of the gold market is evolving—away from a single, tightly integrated system toward a more fragmented landscape, where multiple hubs and pathways shape pricing, flows, and accumulation decisions. 

While the trajectory of central bank gold policy remains uncertain under current conditions, a stronger dollar and rising fiscal demands—whether from defense spending or domestic support—may incentivize some central banks to mobilize gold reserves for liquidity. 

Yet these same conditions—intensifying geopolitical fragmentation and rising monetary risk—may reinforce the opposite impulse: to accumulate gold as insurance, as a hedge against currency volatility, or as part of a broader strategy of reserve diversification away from the dollar. 

This tension reflects a deeper uncertainty. Whether central banks become net sources of liquidity or continue as structural buyers will depend on how the current crisis evolves—whether it remains a liquidity event or transitions into a broader monetary regime shift. 

VIII. What the Quiet Is Actually Saying 

Gold’s muted reaction to current geopolitical tensions is not a failure of its safe-haven role. It is a signal—just not the one most investors are looking for. 

What we are observing is the early phase of a crisis in which liquidity demand, dollar funding pressures, and market microstructure dominate price formation. In this phase, assets are not repriced based on long-term risk, but on immediate funding needs. 

History suggests that these phases do not persist indefinitely. Energy shocks, financial stress, and monetary instability tend to unfold sequentially, not simultaneously. 

If current tensions deepen into broader economic and financial disruption, the forces suppressing gold today may reverse. The same mechanisms driving liquidity demand—margin calls, collateral tightening, and dollar scarcity—often give way to monetary easing and balance sheet expansion. 

It is typically at that point—not during the initial scramble for liquidity—that gold reasserts its role. 

The signal is not absent. It is delayed. 

Gold is not failing as a safe haven—it is being temporarily subordinated to the needs of a dollar-based financial system under stress 

VIIIA. Post Script: "There is No Haven" 

Recent market behavior reinforces this interpretation. In the past week, the dollar, gold, U.S. Treasuries, bitcoin, and oil have all weakened simultaneously. 

In normal circumstances, at least one of these assets would function as a refuge. When all of them decline together, the signal is different: markets are not seeking safety—they are seeking liquidity. 

In other words, the system is still in the scramble-for-cash phase of adjustment or at times like this, markets behave as if no haven exists at all.

 

Oil Shock Meets Systemic Fragility: How War, Inflation, and Liquidity Strains Are Converging on Philippine Banks

 

People always look for political solutions to economic problems. Economic solutions are individually based; they amount to producing more and consuming less. Political solutions are collectively based; they amount to some people deciding how much wealth to take from some other people. The question is, how do political solutions manifest themselves?—Doug Casey 

In this issue

Oil Shock Meets Systemic Fragility: How War, Inflation, and Liquidity Strains Are Converging on Philippine Banks 

I. War, Oil, and Markets: The Shock Transmission Spreads

II. Stagflation Ahoy! Employment Weakens as Inflation Surges

III. The Financial Plumbing: Liquidity Is Tightening Beneath the Surface

IIIA. Bank Liquidity Buffers Are Thinning

IIIB. The Depository Corporations Survey: Credit Transmission Is Stalling

IIIB.1 Liquidity Detaches From Credit

IIIB.2 External Liquidity Replaces Domestic Credit

IIIB.3 Fiscal Absorption in Bank Balance Sheets 

IIIC. The Monetary Authority Survey (MAS): Liquidity Without Transmission

IIID. A Financial System Becoming Balance-Sheet Driven

IV. The Yield Curve’s Hidden Message

V. Oil Shock as the Catalyst for a Banking System Test

VI. The Policy Dilemma Ahead

VII. Conclusion: The Oil Shock Exposes Pre-Existing Fragility  

Oil Shock Meets Systemic Fragility: How War, Inflation, and Liquidity Strains Are Converging on Philippine Banks

The oil shock from the Middle East war exposes underlying financial strains in the Philippine economy, evident in the weakening peso, tightening bank balance sheets, and a shifting yield curve.

I. War, Oil, and Markets: The Shock Transmission Spreads 

Figure 1

Since the latest outbreak of the Middle East conflict involving US, Israel on Iran, global oil markets have repriced sharply. The US WTI and Brent Oil benchmarks have traded slightly below and above the $100/barrel. (Figure 1, topmost chart) 

For an import-dependent economy like the Philippines, the transmission mechanism was immediate. 

Three domestic market reactions stand out. The ‘oil shock’ aggravates the structural pressure from persistent external deficits from the deepening savings-investment gap imbalances 

First, the peso plunged to a record low against the dollar, with the USD/PHP exchange rate surging to 59.735, the highest level on record. (Figure 1 middle graph) 

The move reinforced the breach of the Bangko Sentral ng Pilipinas’ (BSP) 59-level “Maginot Line,” a ceiling the central bank had defended from 2022 through late 2025. 

The March 13 breakout was accompanied by interbank trading volume jumping 16% to roughly $2.23 billion, marking the fifth-largest turnover since 2025 amid the pair’s sharp upward spiral this March. 

Notably, earlier breakouts were rarely accompanied by comparable surges in trading volume, likely reflecting BSP interventions in the market. (Figure 1, lowest image) 

In contrast, the current episode appears to signal strong underlying demand for the US dollar, suggesting that momentum could soon put the 60 level to an immediate test. 

The oil shock further aggravates these pressures, compounding the peso’s weakness alongside persistent external deficits stemming from a widening savings–investment gap. 

Second, domestic equities began to unravel. 

The PSEi erased most of its early-year gains (+0.1% YTD as of March 13), as the prospect of higher energy costs—on top of rising inflation, weaker GDP growth, currency volatility, tighter financial conditions, and continued foreign selling—dampened sentiment and offset earlier orchestrated pumps of the index.

Figure 2 

Third, the domestic bond market began adjusting to mounting inflation risks. Philippine government securities sold off across the curve, while the yield curve reshaped itself through a bearish flattening—a configuration that typically signals rising financial stress rather than healthy growth expectations. (Figure 2, top and middle visuals) 

In short, markets quickly priced the oil shock not as a temporary disturbance, but as a binding macroeconomic constraint.

II. Stagflation Ahoy! Employment Weakens as Inflation Surges 

The ‘oil shock’ arrives precisely as the domestic economy is already emitting stagflationary signals. 

Inflation accelerated again in February. Philippine CPI rose to 2.4%, marking the fourth consecutive monthly increase and a 13-month high.

Figure 3

More alarming was the surge in food inflation for vulnerable households. Food CPI for the bottom 30% income group spiked from 0.6% in January to 2.2% in February, suggesting rising hunger and worsening self-rated poverty among a substantial share of families—despite the rollout of Php 20 rice programs and government-mandated maximum suggested retail prices (MSRPs). (Figure 3, topmost window) 

Crucially, these developments occurred before the oil shock. Yet the first wave of its impact is already visible:

• staggered ‘jumbo’ fuel price increases
• ferry operators beginning to raise fares
• gasoline stations reportedly hiking prices ahead of authorized adjustments
• the Department of Trade and Industry (DTI) warning against hoarding and profiteering
• Meralco announcing another power rate hike on top of January’s GEA-related increase
• Water Utilities, Maynilad and Manila Water to raise rates in the second quarter 

A further inflation risk lies in agricultural inputs. The Philippines remains heavily dependent on imported urea fertilizer, much of it sourced from the Gulf region. (Figure 3, middle diagram) 

Any disruption to supply chains or price spikes linked to Middle East tensions could raise production costs for domestic agriculture, creating second-round pressures on food prices in the months ahead. 

And more drastic adjustments are likely to follow. The snowballing effects and feedback loops from higher energy costs could feed into what may become the third wave of Philippine CPI cycle.

Figure 4

At the same time, as the GDP wobbles, labor market conditions are deteriorating. Unemployment rose to 2.96 million in January 2026—a pandemic era high, while underemployment also increased. Employment rate fell to 94.2%, lowest since June 2022 (Figure 4, topmost image) 

More concerning are the sectoral shifts beneath the headline numbers:

• agricultural employment contracted (Figure 4, middle chart)
• trade employment declined sharply
• labor force participation fell, suggesting that official unemployment figures may understate actual labor slack (Figure 4, lowest image)
• displaced workers increasingly moved into lower-productivity informal sectors 

Rising fertilizer costs also threaten agricultural employment and output, compounding the deterioration already visible in rural labor markets. 

These shifts are critical because they indicate weakening household income capacity precisely as prices for essential goods—fuel, electricity, and water—are rising. 

Moreover, with conflict in the Middle East ongoing, more overseas Filipino workers (OFWs) are being repatriated. This is not merely a humanitarian issue—it also carries macroeconomic consequences. 

As repatriations increase, returning workers expand the domestic labor pool, potentially pushing unemployment or underemployment higher. 

At the same time, fewer workers abroad could mean weaker remittance inflows, widening the Philippines’ balance-of-payments (BoP) deficit—a consequence of its savings-investment gap—and intensifying pressure on the peso.

Remittances are a key pillar of household consumption and savings formation, so disruptions could dampen domestic demand. 

This combination—rising costs colliding with weakening income growth—is the textbook definition of stagflationary pressure. 

For a banking system heavily exposed to consumer lending, mortgages, and corporate leverage, such an environment gradually erodes balance-sheet quality. 

III. The Financial Plumbing: Liquidity Is Tightening Beneath the Surface 

The real story, however, lies beneath the macro headlines—in the financial plumbing of the banking system. 

Recent balance-sheet data from the Bangko Sentral ng Pilipinas reveal a system quietly tightening. 

IIIA. Bank Liquidity Buffers Are Thinning 

Key indicators already show signs of intensifying pressure.

Figure 5

Both cash-to-deposit and liquid-assets-to-deposit ratios have been trending downward, indicating that banks are operating with thinner liquidity buffers relative to their funding base. (Figure 5, topmost pane) 

At the same time, although the non-performing loan (NPL) ratio ticked higher in January from its May 2025 lows, the percentage metric masks a deeper Wile E. Coyote velocity dynamic. 

While the NPL ratio appears relatively contained, gross NPLs measured in pesos have actually climbed to fresh record highs in January. The expansion of bank credit—through the denominator effect—suppresses the ratio even as the absolute level of distressed loans continues to rise. (Figure 5, middle graph) 

To recall, aside from this denominator effect, the suppression of the NPL ratio can also arise from a combination of factors:

• loan restructurings
• charge-offs
• regulatory relief measures
• reclassification effects
• inaccurate reporting 

Viewed from the peso lens, NPLs reveal mounting distress within the system. Viewed from the ratio perspective, the deterioration appears modest. Yet the direction of travel remains critical. Historically, NPL ratios lag economic stress rather than lead it. 

If GDP weakens further while employment softens and energy prices help erode the purchasing power of the peso, this deterioration could accelerate. 

The dynamic resembles what Hyman Minsky described as the transition from hedge finance toward speculative finance. During periods of easy liquidity, borrowers accumulate obligations under the assumption that refinancing will remain available. But when shocks—such as an oil spike, fiscal strain, or currency depreciation—raise costs while eroding incomes, balance sheets that once appeared stable can quickly become fragile. 

IIIB. The Depository Corporations Survey: Credit Transmission Is Stalling 

The Bangko Sentral ng Pilipinas Depository Corporations Survey (DCS) provides a system-wide view of balance sheets across the banking sector. Recent data suggest that the traditional transmission mechanism between liquidity and credit creation is beginning to weaken. 

IIIB.1 Liquidity Detaches From Credit 

Historically, money supply growth in the Philippines has closely tracked bank lending. In a bank-dominated financial system, loans create deposits, and deposit expansion feeds directly into the growth of broad money. 

Recent data, however, show that this relationship has broken down. 

Universal and commercial bank loan growth has been rolling over since mid-2025 even as broad money (M3) continues to expand. The divergence suggests that liquidity creation is increasingly being driven by balance-sheet channels other than private credit expansion. (Figure 5, lowest visual) 

In other words, liquidity is still growing—but the mechanism generating that liquidity is shifting.

IIIB.2 External Liquidity Replaces Domestic Credit 

The shift becomes clearer when examining the external side of the banking system’s balance sheet.

Figure 6

Even as domestic lending slows (claims on Private sector), net foreign assets within the financial system have expanded. Higher gold prices, reserve valuation effects, and external borrowing have all contributed to rising foreign asset positions. Net foreign assets were up 5.9% and 10.2% in the first two months of 2026, while claims on the private sector posted hefty gains of 10.7% and 10.6% respectively. (Figure 6, topmost window) 

These external balance-sheet gains inject liquidity into the domestic financial system despite slowing private credit growth. 

The implication is that a growing share of monetary expansion is being supported by external balance-sheet dynamics rather than internal credit creation. 

IIIB.3 Fiscal Absorption in Bank Balance Sheets 

Another structural shift appears in the composition of bank assets. 

As lending to the private sector slows, banks’ claims on the national government (NCoCG) continue to expand. This suggests that sovereign borrowing is increasingly absorbing liquidity within the financial system. (Figure 6 middle chart) 

When government borrowing begins to dominate balance-sheet expansion, it crucially reflects a crowding-out mechanism, in which the state becomes the primary absorber of financial resources while private credit growth weakens. 

This dynamic creates a paradoxical condition: liquidity remains abundant within the monetary system, yet the flow of credit into productive economic activity begins to substantially slow. 

From the perspective of Austrian capital theory, this shift reflects the kind of structural distortion that prolonged liquidity accommodation can generate. As the late Austrian economist Roger W. Garrison argued, credit expansions can redirect financial resources toward sectors or activities that appear viable only under persistently easy financial conditions. When lending momentum slows or funding conditions tighten, the underlying structure of investment begins to reveal its fragilities. 

IIIC. The Monetary Authority Survey (MAS): Liquidity Without Transmission 

If the Depository Corporations Survey reveals the evolving structure of bank balance sheets, the Monetary Authority Survey (MAS) shows how the central bank’s own balance sheet is shaping liquidity conditions. 

Recent MAS data point to a subtle but important change in the character of monetary expansion. 

One revealing indicator is the divergence between currency in circulation and broad money growth. 

Currency issuance has slowed even as M3 continues to expand. Normally, expanding deposits eventually translate into greater currency usage as money circulates through the broader economy. 

When currency growth decelerates while deposits continue rising, it suggests that liquidity is remaining within the bank dominated financial system rather than circulating through real economic activity. 

This pattern suggests a financial environment in which monetary liquidity expands while bank balance-sheet liquidity tightens. 

Sovereign borrowing increasingly absorbs bank asset capacity while external balance-sheet dynamics inflate monetary aggregates. 

The result is a divergence: liquidity appears abundant in the monetary statistics even as credit transmission to the private economy weakens. 

IIID. A Financial System Becoming Balance-Sheet Driven 

Taken together, the signals from the DCS and MAS point to a financial system undergoing a structural transition. 

Bank lending growth is slowing. Domestic credit expansion is weakening. Currency circulation is decelerating. 

Yet monetary liquidity continues to expand—supported by external asset accumulation, sovereign borrowing, and balance-sheet adjustments within the financial system. 

In other words, system liquidity is still growing, but it is increasingly detached from private credit creation and real economic activity. 

Importantly, these shifts were already visible in the data before the oil shock emerged. The system entered the current energy shock with underlying financial imbalances already developing beneath the surface. 

The oil shock therefore did not create the stress now appearing across markets. It merely accelerated and exposed the structural strains that had already begun to form within the country’s financial architecture. 

IV. The Yield Curve’s Hidden Message 

Finally, the government bond market is beginning to reflect these tensions. 

Figure 7 

Since the outbreak of the Middle East conflict, the Philippine yield curve has shifted toward a bearish flattening, led by a selloff in the belly of the curve—particularly the 5- to 10-year segment. (Figure 7, upper chart) 

Even the front end, which typically reflects expectations about future monetary policy, has begun to rise. (Figure 7, lower graph) 

The increase in short-term Treasury bill yields suggests that markets are beginning to reassess expectations for monetary easing, reflecting growing concern that inflationary pressures and fiscal risks may constrain policy flexibility. 

Yet, such movements in the yield curve often emerge when markets begin pricing a combination of risks:

• inflation pressures
• weakening economic growth
• rising fiscal borrowing needs
• duration risk

Recent policy responses reinforce these concerns. Authorities have begun rolling out subsidies for tricycle and jeepney drivers, and the fisherfolks, including a proposed Php 3.5-billion program to subsidize commuters and partially finance the fuel costs of public utility vehicles (PUVs). 

In the world of “free-lunch politics,” such subsidies risk widening fiscal deficits. The Treasury curve increasingly appears to be pricing the possibility that oil-shock relief measures could translate into larger borrowing requirements and once again inflationary pressures. 

In other words, the curve is not signaling healthy economic expansion. 

Instead, it points toward tightening financial conditions and rising interest-rate pressures. Most importantly, it reflects financial stress emerging under inflation constraints. 

For banks, this shift in the yield curve is not merely a market signal. It directly affects funding costs, asset valuations, and the profitability of maturity transformation—the core business model of the banking system. 

V. Oil Shock as the Catalyst for a Banking System Test 

Taken individually, each of these developments might appear manageable. 

Taken together, however, they form a reinforcing loop. 

Higher oil prices worsen the trade deficit and weaken the peso—an outcome that organically reflects the widening savings-investment gap in the domestic economy. 

A weaker peso raises the cost of imports and intensifies inflationary pressures. 

Rising prices compress real household incomes, while employment weakens as economic growth slows. 

The deterioration of household balance sheets eventually translates into rising loan stress within the banking system. 

As risks increase, banks respond by tightening lending standards and slowing credit growth. The resulting credit contraction then further dampens economic activity, reinforcing the cycle. 

This is the mechanism through which macroeconomic shocks propagate through financial systems. 

VI. The Policy Dilemma Ahead 

The challenge for policymakers is that the traditional policy response may no longer be readily available. 

If inflation remains elevated due to oil prices and currency pressures, the central bank cannot easily deploy aggressive monetary easing. 

Yet if economic growth slows and credit conditions tighten, the usual policy reflex is to rely on easy-money support from the banking system.

If recession risks become imminent, the increasingly crowded fiscal space not only limits the scope for government intervention but may itself amplify financial fragility. 

This is the classic emerging-market policy trap: inflation constrains monetary easing just as financial fragility begins to demand it. 

The dilemma is not purely economic but also institutional. Public choice economists such as James M. Buchanan emphasized that policymakers face incentives to favor short-term stabilization over long-term adjustment. 

Over time, as Mancur Olson observed, institutional arrangements tend to accumulate rigidities that make meaningful reform increasingly difficult.

VII. Conclusion: The Oil Shock Exposes Pre-Existing Fragility 

The current oil shock is not creating the Philippines’ financial vulnerabilities. It is revealing them. 

Years of debt expansion, fiscal deficits, and reliance on liquidity support have already stretched balance sheets across households, corporations, banks, and even the government itself. 

The war-driven surge in oil prices simply adds another layer of stress to an already fragile system. 

If energy prices remain elevated and the peso continues weakening, the Philippine banking sector may soon face a test not seen since the pandemic period—this time under far less accommodating global financial conditions. 

The coming months will determine whether the financial system can absorb the shock. 

Or whether the oil spike ultimately becomes the catalyst that exposes deeper structural strains within the country’s financial architecture. 

Caveat Emptor.

 

The Php3.9 Trillion Savings-Investment Gap: How the Middle East Conflict Exposed the Philippines’ Economic Fragility

 

“War,” Mises observed, “is harmful, not only to the conquered but to the conqueror. Society has arisen out of the works of peace; the essence of society is peacemaking. Peace and not war is the father of all things. Only economic action has created the wealth around us; labor, not the profession of arms, brings happiness. Peace builds; war destroys.”—Llewellyn H. Rockwell Jr 

In this issue 

The Php3.9 Trillion Savings-Investment Gap: How the Middle East Conflict Exposed the Philippines’ Economic Fragility

I. Geopolitical Shock: Philippine Markets React

II. February Yield Curve: Fragility Already Forming

III. What the Yield Curve Reflects: The Consumption of Savings

IV. The Defective Anchor: Savings Is a Residual of GDP

V. The Php3.9 Trillion Gap: Structural, Not Cyclical

VI. Inflation and the Erosion of Real Savings

VII. Fiscal Absorption, and Budget Excess

VIII. Record Public Debt Magnifies the Crowding Out

IX. Micro Signals: Consumption Recalibration (Marks and Spencer, SM Foot Traffic)

X. BSP Increases Cash Withdrawal Limits and Financial Stability

XI. External Shock Transmission: When Geopolitics Meets Structural Fragility

A. Energy and Food Inflation

B. Industrial Supply Chain Disruptions

C. OFWs, Tourism and Service Sector Exposure

D. Financial Transmission and Emerging Market Stress

XII. Strategic Vulnerability: Drift to a War Economy, Thucydides Trap Geopolitics

XIII. Systemic Shock Scenario

XIV. Conclusion: The Real Constraint: Savings Scarcity in a Volatile World 

The Php3.9 Trillion Savings-Investment Gap: How the Middle East Conflict Exposed the Philippines’ Economic Fragility 

Rising oil prices, supply chain risks, and widening external imbalances are revealing deeper structural weaknesses in savings, fiscal dynamics, and financial markets. 

The Php3.9 Trillion Savings-Investment Gap: How the Middle East Conflict Exposed the Philippines’ Economic Fragility 

I. Geopolitical Shock: Philippine Markets React 

Last week we wrote: 

For the Philippines, the combined pressures of higher oil prices, currency weakness, policy constraints, and potential remittance volatility point to heightened market volatility and widening sectoral divergence amid slowing GDP growth. This increases stagflationary and credit risks. 

The escalation of the U.S.–Israel–Iran conflict triggered a sharp repricing across Philippine financial markets.

Figure 1 

• The USD–Philippine peso reclaimed the 59 level, the BSP’s Maginot Line. 
• Despite rescue pumps centered on International Container Terminal Services Inc. (ICTSI), the primary equity benchmark, the PSEi 30, fell by 4.4%. (Figure 1, topmost pane)
• Worse, yields of the Philippine Treasury curve rose across maturities, drastically shifting direction from bullish to bearish steepening, reflecting a broad rise in rates. (Figure 1 , middle image) 

However, the adjustment was not uniform across maturities. 

Yields in the belly of the curve — particularly in the five-to-ten-year segment — rose the most, suggesting that investors were reassessing medium-term inflation and fiscal risks rather than short-term policy expectations. Such a pattern is consistent with a rise in the term premium, where investors demand additional compensation for holding duration amid heightened uncertainty. 

Relative pricing reinforces this interpretation. 

Philippine ten-year yields have recently risen faster than their U.S. Treasury counterparts, widening the spread between the two benchmarks. If the move were purely a global risk-off adjustment, local yields would likely mirror U.S. Treasuries. (Figure 1, lowest graph) 

Instead, the divergence suggests that global shocks are interacting with domestic vulnerabilities already embedded in the curve — including rising sovereign absorption of liquidity and persistent fiscal supply. 

In that sense, the geopolitical shock did not create the steepening dynamic; it exposed and accelerated pressures that were already forming within the Philippine yield structure. 

The Middle East conflict may therefore reveal something deeper about the Philippine economic development model — particularly the country’s persistent savings-investment gap. 

II. February Yield Curve: Fragility Already Forming 

Prior to the outbreak of the Middle East conflict, the Philippine yield curve in February already exhibited subtle signs of structural tension.

Figure 2

The curve experienced bullish steepening: short-dated yields fell sharply as markets priced policy relief, while the belly of the curve declined more modestly. Yet the longest maturities — particularly the 20- to 25-year segment — failed to rally alongside the front end. (Figure 2, topmost window) 

This divergence reflected optimism over near-term liquidity conditions but lingering skepticism over long-horizon risks. 

Investors appeared willing to price policy accommodation in the short run, while still demanding continued compensation for holding ultra-long duration amid persistent fiscal issuance and the possibility that easing could eventually translate into renewed inflation pressure. 

In short, the curve suggested that markets were optimistic about near-term liquidity but cautious about long-term stability. 

That skepticism would later prove meaningful once geopolitical risks intensified. 

III. What the Yield Curve Reflects: The Consumption of Savings 

The yield curve’s structure is ultimately a reflection of accumulating imbalances arising from the persistent consumption of savings. 

When investment chronically exceeds domestic savings, the difference must be financed through borrowing, foreign capital inflows, or monetary accommodation (financial repression/inflation tax). 

As this imbalance widens, the bond market begins to reflect the underlying funding pressure through changes in yield levels and curve structure. 

In such an environment, the yield curve becomes more than a signal of growth expectations. It becomes a barometer of the economy’s capacity to finance its own investment demand. 

The Philippine curve’s evolving shape therefore hints at a deeper structural issue: the scarcity of domestic savings relative to the scale of investment being pursued. 

IV. The Defective Anchor: Savings Is a Residual of GDP 

The Philippines reported a record savings-investment gap in 2025. Gross domestic savings reached Php2.35 trillion, equivalent to 8.4% of GDP, while investment reached Php 6.25 trillion, or 22.3% of GDP, resulting in a Php 3.9 trillion gap, about 5.4% higher than in 2024. (Figure 2, lower chart) 

However, the savings figure itself is derived from the GDP framework. 

Gross domestic savings is not directly observed thrift. Instead, it is calculated as: 

GDP – Final Consumption Expenditure 

This means the savings figure is fundamentally an accounting residual, not a direct measurement of household or corporate saving behavior. 

Several implications follow:

• If GDP is overstated, savings is automatically overstated.
• If government spending inflates GDP, savings mechanically rises — even if households are financially strained.
• If inflation boosts nominal GDP, “savings” increases on paper without improving real financial capacity.
• A GDP powered by debt expansion does not necessarily entail rising savings, but rather extended leveraging. 

An 8.4% savings rate does not necessarily mean households saved more. It means the national income accounting identity indicates that they did.

Figure 3

In a deficit-driven economy where public spending is elevated, GDP itself can be propped up by the very borrowing used to finance the savings-investment gap. This makes the savings measure partially endogenous to debt expansion. 

In 2025, the increase in nominal borrowing exceeded growth of nominal and real GDP! (Figure 3, topmost visual) 

In effect, the economy is using a debt-inflated denominator to measure the shortage of savings required to fund debt-driven investment. 

That circularity matters. 

V. The Php3.9 Trillion Gap: Structural, Not Cyclical 

The magnitude of the imbalance becomes clearer when the savings-investment gap is examined directly.

In 2025:

• Savings: Php2.35 trillion
• Investment: Php6.25 trillion
• Gap: –Php3.90 trillion

This represents the largest gap in recent years and marks a continuation of a widening trend since 2022. 

Such an imbalance is not merely a statistical curiosity. It represents the scale of financing required from outside the domestic savings pool to sustain the country’s investment program.

When investment persistently exceeds domestic savings, the difference must be financed through: 

• external capital inflows
• increased public or private borrowing
• monetary accommodation
• or some combination of all three. 

There is no automatic equilibrium mechanism that closes such a gap organically. The imbalance can narrow only through:

• higher real savings, lower investment,
• or a cyclical downturn that compresses demand. 

Yet the Philippine economy is attempting to sustain an investment rate exceeding 22 percent of GDP while maintaining a single-digit domestic savings rate. 

Maintaining this configuration requires continuous financial intermediation and leverage expansion. 

In effect, investment persists even when the domestic financial base capable of supporting it remains limited. 

VI. Inflation and the Erosion of Real Savings 

Inflation dynamics further complicate the savings constraint. 

Even moderate price increases reduce the real purchasing power of the savings that households and firms are able to accumulate. When inflation is concentrated in essential expenditures—such as food, energy, and housing—the erosion of savings becomes particularly pronounced among lower- and middle-income households. 

While headline inflation may remain within official target ranges, its composition and distribution matters. Food inflation and other essential expenditures absorb a large share of household income, limiting the ability of households to build financial buffers. 

For instance, February data show that the Food CPI for the bottom 30% jumped from 0.6% to 2.2%, signaling rising pressure on the consumption basket of poorer households and foreshadowing renewed stress in hunger and self-rated poverty indicators. (Figure 3, middle diagram) 

Which raises a simple question: whatever happened to the nationwide Php20 rice rollout and the MSRP regime? Or has the law of diminishing returns quietly reasserted itself? (Figure 3, lowest chart) 

These pressures are emerging even before any potential spillovers from the evolving Middle East conflict. 

This means that even if nominal savings appear stable within national accounts, the real savings available to finance domestic investment may be shrinking. 

In such an environment, the effective savings-investment gap becomes wider than what the nominal accounting framework suggests.

Figure 4

In any case, the Bangko Sentral ng Pilipinas’ easing cycle has contributed to the recent acceleration in CPI, reinforcing the broader inflationary cycle. If current liquidity trends persist, these dynamics may generate a third wave of inflation cycle (as we continually forecast), which would continue to erode the real value of household savings. (Figure 4, topmost diagram) 

VII. Fiscal Absorption, and Budget Excess 

Fiscal dynamics have increasingly played a central role in bridging the savings-investment imbalance. 

Large public investment programs and persistent fiscal deficits require sustained government borrowing. As sovereign issuance expands, the state absorbs a growing share of the available liquidity within the domestic financial system. 

Another dimension of fiscal dynamics involves the difference between released budget allocations and actual spending disbursements. 

When government agencies receive funding releases ahead of actual project implementation, liquidity enters the financial system before real economic activity materializes. This can temporarily ease financial conditions even as underlying fiscal supply continues to accumulate. 

The result is a financial environment where liquidity conditions may appear accommodative in the short run while structural funding pressures continue to build beneath the surface. 

Actual 2025 spending hit Php6.49T, exceeding the Php 6.33T enacted GAA—the second-largest overrun since 2021 and the seventh straight year of excess. (Figure 4, middle graph) 

Persistent post-enactment augmentation weakens Congress’s budget authority and shifts fiscal discretion to the executive. 

Meanwhile, the Bureau of the Treasury reported a Php1.577 trillion fiscal deficit in 2025—third widest in history, as government expenditures reached a record Php6.03 trillion while revenues totaled Php4.453 trillion. (Figure 4, lowest chart) 

The Php 6.49 trillion represents total allotments released—spending authority exercised during the year—while the Php6.03 trillion reflects actual cash disbursements recorded by Treasury. Allotments and cash outflows do not perfectly align due to timing lags, multi-year obligations, and accounting adjustments. Both figures are valid, but they measure different stages of fiscal execution. 

VIII. Record Public Debt Magnifies the Crowding Out 

Public debt dynamics reinforce this absorption effect.

Figure 5 

As fiscal deficits accumulate, the government must continuously refinance maturing obligations while issuing additional securities to fund new borrowing requirements. This process steadily expands the sovereign’s claim on domestic and external savings pools. (Figure 5, topmost window) 

Recent data from the Bureau of the Treasury show that national government debt continued to climb in January 2026 to reach a record Php 18.134 trillion, reflecting the cumulative impact of sustained fiscal deficits, elevated interest costs, and ongoing borrowing to finance development programs. The rate of debt growth has steadily been rising since 2023. (Figure 5, middle image) 

While debt expansion can support public investment in the near term, it simultaneously increases the financial system’s exposure to sovereign credit and interest-rate risk. 

Rising debt levels therefore deepen the interaction between fiscal policy and domestic liquidity conditions. As government securities issuance expands, banks, pension funds, and institutional investors allocate a larger share of their portfolios to sovereign instruments, potentially crowding out private sector credit over time 

The Bank’s net claims on the central government spiked to a record Php 6.135 trillion in December 2025—equivalent to about 35% of outstanding government debt now effectively monetized by the banking system. (Figure 5, lowest chart) 

Nonetheless, treasury markets often register these pressures first, particularly through changes in the term structure of interest rates. 

IX. Micro Signals: Consumption Recalibration (Marks and Spencer, SM Foot Traffic) 

Macroeconomic imbalances often surface first in microeconomic behavior. 

Recent developments in Philippine retail illustrate subtle shifts in consumption patterns. 

The recalibration of operations by international retailers such as Marks & Spencer (M&S) suggests increasing sensitivity of discretionary spending to economic conditions. 

Premium and mid-tier consumption categories are typically among the earliest segments to reflect shifts in household purchasing power. When real income growth slows or financial buffers weaken, consumers tend to prioritize essential spending while reducing discretionary purchases. 

The cautionary signal from M&S is reinforced by declining mall activity reported by SM Prime Holdings, with foot traffic in SM Supermalls reportedly falling by roughly 26 percent (from a record 1.9 billion visitors in 2024 to 1.4 billion in 2025. This coincides with a moderation in per-capita GDP growth, which slowed to 2.9 percent in the fourth quarter and 3.7 percent for 2025. 

Supermarket operators have likewise reported weaker-than-expected demand, alongside signs of customer migration toward lower-priced distributors and wholesalers. These developments have also been attributed partly to the impact of recent minimum-wage adjustments, which may be affecting both consumer purchasing patterns and retail cost structures.

Figure 6

At the same time, the recent softness in per-capita household income growth has been accompanied by plateauing credit expansion among universal banks and a gradual easing in employment growth. (Figure 6, upper and lower graphs) 

Taken together, these indicators point to deepening signs of demand-side fatigue and raise the possibility of emerging stagflationary pressures. 

The pattern suggests sustained compression in consumption velocity and discretionary elasticity—conditions under which portfolio recalibration, such as M&S’s operational adjustments, becomes economically rational. 

Such responses are consistent with an economic environment where investment remains elevated while fiscal expansion absorbs a significant share of domestic resources (crowding out effect). In this context, increasingly leveraged balance sheets may constrain income generation and limit the capacity for household savings formation. 

In this sense, retail recalibration may represent a microeconomic reflection of the broader macroeconomic imbalance. 

X. BSP Increases Cash Withdrawal Limits and Financial Stability 

As the savings–investment imbalance widens, maintaining financial stability increasingly depends on liquidity management. The Bangko Sentral ng Pilipinas’ increase of the AML cash-withdrawal trigger from Php500,000 to Php1 million illustrates how regulatory measures—aimed at curbing corruption—interact with liquidity conditions in a system where domestic savings alone cannot fully support investment. 

When access to deposits is subject to thresholds or enhanced monitoring, behavior adjusts. Firms stagger transactions, households hoard cash, and informal channels gain marginal attractiveness. The earlier Php 500,000 threshold already intersected routine commercial flows, so even small frictions can influence normal business activity. Raising the trigger reflects calibration, signaling awareness that liquidity behavior matters for stability. 

External shocks further expose structural constraints. Rising energy prices or currency pressures reveal the fragility of a growth model reliant on debt-financed investment amid limited domestic savings. In this environment, regulatory calibration becomes a recurring feature of financial governance, shaping behavior at the margins and influencing the circulation of money in the economy. 

Legal definitions may distinguish between “capital controls” and “AML thresholds,” but economic agents respond to function, not classification. If large withdrawals attract friction, delay, or reputational risk, behavior adjusts. Firms stagger transactions. Households pre‑emptively hoard cash. Informal channels gain marginal attractiveness. Velocity softens at the edges. Such policy creates forced trade‑offs in the use of private property. 

Freedom conditioned by compliance is still freedom altered. In functional terms, the BSP withdrawal cap operates as a form of capital control—an indirect restraint on liquidity mobility, justified under the banner of anti‑money laundering. 

The label may differ, but the effect is the same: liquidity is managed not only by market forces but by regulatory thresholds that redefine how money circulates. 

XI. External Shock Transmission: When Geopolitics Meets Structural Fragility 

The Middle East conflict introduces several transmission channels that could amplify the Philippines’ already fragile savings-investment balance. 

Note: In an increasingly complex and interconnected world, the factors outlined above represent only the “seen” or visible channels and their immediate second-order effects. Should the current disorder persist, the transmission mechanisms could extend far beyond this list, propagating through indirect and more diffuse channels that would require a far more exhaustive examination. Even so, the initial escalation of the Middle East conflict is already significant enough to expose underlying imbalances—both domestically and across the global economy. 

A. Energy and Food Inflation 

The Philippines remains heavily dependent on imported energy. A sustained rise in oil prices resulting from instability in the Middle East could increase transportation and production costs across the economy. 

Higher energy prices often translate into food inflation, as logistics, fertilizer costs, and agricultural inputs become more expensive. Because food accounts for a significant share of household expenditure (34.78% in BSP/PSA CPI basket), rising prices reduce the ability of households to accumulate savings. 

In an economy already characterized by limited domestic savings, such inflationary pressures further weaken the financial base—via weakened savings structure—needed to support investment.

B. Industrial Supply Chain Disruptions 

A broader regional conflict could also disrupt global supply chains. 

Industrial inputs, shipping routes, and energy supply lines connecting Asia, Europe, and the Middle East could face delays or increased insurance costs. These disruptions would raise production costs and freight rates, placing additional pressure on import-dependent economies like the Philippines. 

Higher freight costs translate directly into higher import prices, reinforcing inflationary pressures and worsening the country’s trade balance. 

C. OFWs, Tourism and Service Sector Exposure 

Geopolitical instability can affect the Philippines through multiple channels, including overseas Filipino workers (OFWs), travel flows, and tourism confidence.

Figure 7

The country’s reliance on remittances, particularly from the Middle East, creates potential vulnerability: any disruption to regional labor markets could reduce household income and weaken domestic consumption. 

OFW personal and cash remittances grew 3.3% in 2025, marginally above 3% in 2024, but both continue a gradual slowdown in growth since 2010, consistent with diminishing returns. Nevertheless, nominal inflows reached record levels of $39.6 billion (personal) and $35.6 billion (cash). (Figure 7, topmost pane) 

Even though the Philippines is not near the conflict zone, global travel demand often declines during periods of geopolitical uncertainty. 

A slowdown in tourism receipts would reduce foreign exchange inflows and weaken service-sector revenues. 

Combined with rising energy import costs, lower remittances and tourism earnings could widen the current account deficit, exposing the economy to external shocks. 

After a significant statistical revision, foreign tourist arrivals shifted from contraction to growth. Foreign arrivals rose 9.2% in 2025, up from 8.7% in 2024, while total arrivals including overseas Filipinos increased 9%, slightly below the 9.2% growth recorded in 2024. Gross arrivals reached 5.9 million, exceeding 2016 levels. (Figure 7, middle graph) 

The Philippines is considered particularly vulnerable to oil price shocks due to its deficit channel, highlighting how geopolitical events can amplify existing structural imbalances in income, savings, and external liquidity. 

Philippine Balance of Payments BoP deficits have accumulated since 2014, broadly coinciding with the increasing share of government spending in GDP. The pandemic recession amplified this trend. In 2025, the BoP recorded a $5.6 billion deficit, the second-largest shortfall since 2022. (Figure 7, lowest chart) 

D. Financial Transmission and Emerging Market Stress 

Financial markets represent another channel through which geopolitical shocks propagate. 

Periods of global uncertainty often push investors toward safe-haven assets such as U.S. Treasuries, US dollar and gold. For emerging markets with structural savings deficits, this shift can lead to tighter financial conditions. 

Rising global yields and capital outflows can trigger margin calls, balance sheet adjustments, and risk repricing across emerging market debt markets. 

Countries relying heavily on external financing to sustain investment programs may therefore face increasing borrowing costs or reduced access to capital. 

XII. Strategic Vulnerability: Drift to a War Economy, Thucydides Trap Geopolitics 

The Philippines’ strategic alignment with the United States also introduces geopolitical considerations. 

The presence of nine U.S. military facilities across several Philippine locations under the Enhanced Defense Cooperation Agreement places the country within the broader regional security architecture of the United States. 

In the event that a regional conflict expands beyond the Middle East into a broader geopolitical confrontation, these installations could increase the Philippines’ exposure to geopolitical risk and economic disruption. 

Since the outbreak of the U.S.–Israel–Iran war, U.S. bases in the Middle East have repeatedly become targets of attacks or retaliatory strikes—underscoring how overseas installations can act as magnets for escalation during conflict.

Figure 8

Since the outbreak of the US–Israel–Iran conflict, energy markets appear to be pricing a more prolonged confrontation. Both Brent Crude and West Texas Intermediate have climbed above $90 per barrel (as of March 6th), lifting coal and European natural gas prices and signaling expectations of sustained disruption rather than a short-lived shock. 

The energy price surge suggests that Iran retains the ability to impose meaningful costs on United States and Israel operations—contrary to earlier mainstream assumptions of a swift resolution. 

Combined with Donald Trump’s demand for Iran’s “unconditional surrender,” the probability of a protracted confrontation rises, with potentially serious consequences for global markets. 

More broadly, the conflict may reflect a deeper structural shift toward the militarization (Bushido/Sparta) of the global economy (previously discussed)—a transition toward what could be described as a modern war economy. 

Intensifying strategic rivalry between major powers increasingly resembles the dynamics described in the Thucydides Trap, where rising and established powers enter periods of heightened confrontation. 

In this context, several entwined structural forces may be reinforcing the escalation dynamic: 

• the neoconservatives, dogmatic practitioners of strategic hegemonic doctrines such as the Wolfowitz Doctrine,
• the deepening influence of the military-industrial complex first warned about by Dwight D. Eisenhower,
• the geopolitical influence of lobbying organizations such as American Israel Public Affairs Committee, to promote Greater Israel and
• the role of ultra-loose monetary policy by the Federal Reserve in facilitating large-scale deficit spending, funding military expenditures. 

Taken together, these forces—what might be described metaphorically as the “four horsemen” of the deepening war economy—risk reinforcing a cycle in which expanding military spending, protectionism, and the weaponization of finance and energy reshape the global economic order. 

If sustained, such dynamics could crowd out productive investment, deepen geopolitical fragmentation, and increase the probability that regional conflicts evolve into broader geopolitical confrontation—World War III—alongside rising risks of financial instability. 

XIII. Systemic Shock Scenario 

Taken together, these channels illustrate how a regional conflict could evolve into a broader systemic shock. 

Energy markets, global supply chains, financial markets, remittances and tourism flows are deeply interconnected. A prolonged conflict could therefore produce cascading effects across trade, inflation, capital flows, and financial stability. 

For economies with strong domestic savings buffers, such shocks can often be absorbed through internal financing capacity. 

For economies operating with a persistent savings-investment gap, however, external disturbances can rapidly translate into currency pressure, rising yields, and financial volatility. 

The Middle East conflict did not create the Philippines’ structural vulnerabilities. 

But by simultaneously pressuring energy prices, supply chains, capital flows, and financial markets, it may reveal the limits of an economic model that relies on debt-financed investment amid chronically weak domestic savings. 

XIV. Conclusion: The Real Constraint: Savings Scarcity in a Volatile World 

The escalation of the Middle East conflict ultimately highlights a deeper structural reality confronting the Philippine economy. 

Statistics record the past, but the savings–investment gap is inherently forward-looking. Investment decisions occur ex-ante, while national accounts measure the results only after the fact. 

The Philippines is attempting to sustain an IDEOLOGICAL development premise in which investment spending remains substantially above the domestic savings rate the economy generates. The resulting imbalance must therefore be continuously bridged through higher taxation, expanding public debt (and thus higher future taxes), financial repression through inflation, or reliance on external capital flows. 

Such a structure can function during periods of easy global liquidity and relative geopolitical stability. But it becomes increasingly fragile when conditions shift—whether through rising energy prices, supply chain disruptions, tightening financial conditions, or other manifestations of unsustainable economic dynamics (external or internal). 

In that environment, the true constraint on economic expansion is no longer the willingness to invest, but the availability of real savings capable of financing that investment without destabilizing the financial system. 

The Middle East conflict did not create this imbalance. 

It merely revealed how narrow the Philippines’ margin of financial stability may already be. 

_____ 

Selected References 

Prudent Investor Newsletters, Liquidity at the Top: The PSEi 30’s Two-Months Rally Meets Structural Fragility Amid Middle East War Risks, Substack March 01, 2026 

Prudent Investor Newsletters, PSE Divergence Confirmed — The September Breakout That Redefined Philippine Mining in the Age of Fiat Disorder Substack October 08, 2025