Economic interventionism is a self-defeating policy. The individual measures that it applies do not achieve the results sought. They bring about a state of affairs, which—from the viewpoint of its advocates themselves—is much more undesirable than the previous state they intended to alter—Ludwig von Mises
In this issue
The BSP’s Seventh Rate Cut, the Goldilocks Delusion, and
Technocracy in Crisis
I. The Goldilocks Delusion: Rate Cuts as Ritual
II. Cui Bono: Government as the Primary Beneficiary
III. Wile E. Coyote Finance: The Race Between Bank Credit
Expansion and the NPL Surge
IV. Minsky’s Warning: Fragility Beneath the Easing
V. Concentration and Contagion, The Exclusion of
Inclusion: MSMEs and the Elite Credit Divide
VI. A Demand-Driven CPI? BSP’s Quiet Admission: Demand
Weakness Behind Low Inflation
VII. Employment at the Edge of Fiction: Volatility,
Illusion, and Structural Decay
VIII. The War on Cash and the Politics of Liquidity
IX. The War on Cash Disguised as Corruption Control
X. From Cash Limits to Systemic Liquidity Locks
XI. The Liquidity Containment Playbook and the
Architecture of Control
XII. Curve-Shaping and Fiscal Extraction
XIII. When Discretion Becomes Doctrine: From
Institutional Venality to Kindleberger’s Signpost
The BSP’s Seventh Rate Cut, the Goldilocks Delusion, and Technocracy in Crisis
From rate cuts to cash caps: how the BSP’s containment playbook reshapes power and fragility in the Philippine economy
I. The Goldilocks Delusion: Rate Cuts as Ritual
In delivering its “surprise” seventh rate cut for this August 2024 episode of its easing cycle, the BSP chief justified their decision on four grounds:
- 1 Outlook for growth has softened in the near term
- 2 Growth was weaker because demand is weaker. This, in turn, is why inflation is low
- 3 Governance concerns on public infrastructure spending have weighed on business sentiment
- 4 “We’re still refining our estimates. We had thought that our Goldilocks policy rate was closer to 5 percent, now it’s closer to 4 percent. So we have to decide where we really are between 5 percent and 4 percent.”
For a supposedly data-dependent political-monetary institution, the BSP never seems to ask whether rate cuts have delivered the intended results—or why they haven’t. The rate-cut logic rests on a single pillar: the belief that spending alone drives growth.
In reality, the BSP’s spree of rate and reserve cuts, signaling channels, and relief measures has produced a weaker, more fragile economy.
Figure 1
GDP rates have been declining since at least 2012, alongside the BSP’s ON RRP rates. Yet none of this is explained by media or institutional experts. These ‘signal channeling’ tactics are designed for the public to unquestioningly accept official explanations. (Figure 1, upper chart)
II. Cui Bono: Government as the Primary Beneficiary
Second, cui bono—who benefits most from rate cuts?
The biggest borrower is the government. Its historic deficit spending spree hit an all-time high in 1H 2025, reaching a direct 16.71% share of GDP. This is supported by the second-highest debt level in history—ballooning to Php 17.468 trillion in August 2025—and with it, surging debt servicing costs. (Figure 1, lower window)
As explained in our early October post:
- More debt → more servicing → less for everything else
- Crowding out hits both public and private spending
- Revenue gains won’t keep up with servicing
- Inflation and peso depreciation risks climb
- Higher taxes are on the horizon
The likely effect of headline “governance concerns” and BSP’s liquidity containment measures—via capital and regulatory controls—is a material slowdown in government spending. In an economy increasingly dependent on deficit outlays, this amplifies what the BSP chief calls a “demand slowdown.”
In truth, the causality runs backward: public spending crowding out and malinvestments cause weak demand.
III. Wile E. Coyote Finance: The Race Between Bank Credit Expansion and the NPL Surge
Banks are the second biggest beneficiaries. Yet paradoxically, despite the BSP’s easing cycle, the growth rate of bank lending appears to have hit a wall.
Gross Non-Performing Loans (NPL) surged to a record Php 550 billion up from 5.4% in July to 7.3% in August. (Figure 2, topmost image)
Because lending growth materially slowed from 11% to 9.9% over the same period, the gross NPL ratio rose from 3.4% to 3.5%—the highest since November 2024. This is the Wile E. Coyote moment: credit velocity stalls and NPL gravity takes hold.
As we noted in September:
“Needless to say, whether in response to BSP policy or escalating balance sheet stress, banks may begin pulling back on credit—unveiling the Wile E. Coyote moment, where velocity stalls and gravity takes hold.”
Even BSP’s own data confirms that the past rate cuts have barely permeated average bank lending rates. As of July 2025, these stood at 8.17%—still comparable to levels when BSP rates were at their peak (8.23% in August 2024). The blunting of policy transmission reveals deep internal imbalances. (Figure 2, middle graph)
Production loans (9.8%) signaled the slowdown in lending, while consumer loans (23.4%) continued to sizzle in August. The share of consumer loans reached a historic 15.5% (excluding real estate loans). (Figure 2, lowest visual)
IV. Minsky’s Warning: Fragility Beneath the Easing
The BSP’s admission that the economy has softened translates to likely more NPLs and an accelerating cycle of loan refinancing. Whether on the consumer or supply side, this incentivizes rate cuts to delay a reckoning
From Hyman Minsky’s Financial Instability Hypothesis, this deepens the drift toward Ponzi finance: insufficient cash flows from operations prompt recycling of loans and asset sales to fund mounting liabilities. (see Reference)
Figure 3
As major borrowers, lower rates also benefit banks’ own borrowing sprees. While banks trimmed their August bond and bill issuances (-0.79% YoY, -3.7% MoM, share down from 6.52% to 6.3%), both growth rates and shares remain on an uptrend. (Figure 3, topmost graph)
The slowdown in bank borrowing stems from drawdowns from BSP accounts—justified by recent reserve rate ratio (RRR) cuts. BSP’s MAS reported a Php 242 billion bounce in liabilities to Other Depository Corporations (ODC) in August, reaching Php 898.99 billion. (Figure 3, middle diagram)
Ultimately, the seventh rate cut—deepening the easing cycle—is designed to keep credit velocity ahead of the NPL surge, hoping to stall the reckoning or spark productivity-led credit expansion. Growth theater masks the real dynamics.
Rate cuts today are less about the economy and more about survival management within the financial system.
V. Concentration and Contagion, The Exclusion of Inclusion: MSMEs and the Elite Credit Divide
MSME lending—the most vital segment—continues to wane. Its share of total bank lending fell to a paltry 4.6% in Q2, the lowest since 2009. Ironically, MSME lending even requires a mandate. BSP easing has little impact here. (Figure 3, lowest visual)
Some borrowers engage in wholesale lending or microfinancing—borrowing from banks to relend to SMEs. But if average bank lending rates haven’t come down, why would this segment benefit?
Informal lenders, who fill the gap left by banks, absorb this risk—keeping rates sticky, as in the case of 5-6 lending.
Figure 4
In 1H 2025, borrowings of the 26 non-financial PSEi members reached a record Php 5.95 trillion—up Php 423.2 billion YoY, or 7.7%. That’s about 16.92% of total financial resources (TFR) as of June 2025. Bills Payable of the PSEi 30’s 4 banks jumped 64.55% YoY to P 859.7 billion. (Figure 4, topmost graph)
This concentration is reflected in total financial resources/assets: Philippine banks, especially universal-commercial banks, hold 82.7% and 77.1% of total assets respectively as of July.
Mounting systemic fragility is being masked by deepening concentration. A credit blowup in one major sector or ‘too big to fail’ player could ripple through the financial system, capital markets, interest rate channel, the USD–PHP exchange rate—and ultimately, GDP.
The structure of privilege and fragility is now one and the same.
VI. A Demand-Driven CPI? BSP’s Quiet Admission: Demand Weakness Behind Low Inflation
Contrastingly, when authorities present their CPI data, the penchant is to frame inflation as a supply-side dynamic. Yet in our humble opinion, this marks the first time that the BSP confesses to a demand-driven CPI.
September CPI rose for the second consecutive month—from 1.5% to 1.7%. If the ‘governance issues’ have exacerbated the demand slowdown, why has CPI risen? Authorities pointed to higher transport and vegetable prices as the culprit.
Yet core CPI slowed from 2.7% in August to 2.6% in September, suggesting that the lagged effects of earlier easy money have translated to its recent rise.
But that may be about to change.
The drop in core CPI to 2.6% YoY was underscored by its month-on-month (MoM) movement, as well as the headline CPI’s MoM, both of which were flat in September. Historically, a plunge in MoM tends to signal interim peaks in CPI. (Figure 4, middle and lowest diagrams)
So, while the unfolding data suggest that public spending may slow and bank lending continues to decelerate, “demand is weaker” would likely mean not only a softer GDP print but an interim “top” in CPI.
If inflation reflects weak demand, labor data should show the same — yet the opposite is being claimed
VII. Employment at the Edge of Fiction: Volatility, Illusion, and Structural Decay
Authorities also produced another remarkable claim—on jobs.
Figure 5
They say employment rates significantly rebounded from 94.67% in July to 96.1% in August, even as the August–September CPI rebound supposedly showed that “demand is weaker.” This rebound was supported by a sudden surge in labor force participation—from 60.7% in July to 65.06% in August. (Figure 5, topmost and middle charts)
The PSA’s employment data defies structural logic. Labor swings like stocks despite rigid labor laws and weak job mobility. The data also suggest that the wide vacillation in jobs indicates abrupt shifts between searching for work and refraining from doing so—as reflected in the steep changes in labor force participation.
Furthermore, construction jobs flourished in August even amid flood-control probes, reflecting either delayed fiscal drag—or inflated data, to project immunity of labor markets from governance scandals. (Figure 5, lowest graph)
Yet high employment masks poor-quality, low-literacy work—mostly in MSMEs—which explains elevated self-rated poverty and hunger rates.
Additionally, both employment and labor force data have turned ominous: a rounding top in employment rates, while labor force participation also trends downward.
Despite tariff woes, the slowdown in manufacturing jobs remains moderate.
Nonetheless, beneath this façade, record consumer credit and stagnant wages reveal a highly leveraged, increasingly credit-dependent household sector.
Labor narrative inflation—the embellishment of job metrics—would only exacerbate depressed conditions during the next downturn, leading to sharper unemployment.
When investors interpret inaccurate data as fact, they allocate resources erroneously. The resulting imbalances won’t just show up in earnings losses—they’ll manifest as outright capital consumption.
And while public spending may be disrupted, authorities can always divert “budget” caught in controversies to other areas.
That said, jobs decay could rupture the banks propping up this high-employment illusion.
VIII. The War on Cash and the Politics of Liquidity
This week puts into the spotlight two developments which are likely inimical to the banking system, the economy and civil liberties.
This Philstar article points to the banking system’s implementation of the BSP’s Php 500,000 withdrawal cap, which took effect in October.
We earlier flagged seven potential risks from the BSP’s withdrawal limit: financial gridlock that inhibits the economy; capital controls that permeate into trade; indirect rescue of the banking system at the expense of the economy; possible confidence erosion in banks—alongside CMEPA; tighter credit conditions; rising risk premiums and capital flight; and, finally, the warning of historical precedent. (see reference)
For instance, we wrote, "these sweeping limits target an errant minority while penalizing the wider economy. Payroll financing for firms with dozens of employees, capital expenditures, and cash-intensive investments and many more aspects of commerce all depend on such flows."
The Philstar article noted, "Several social media users, particularly small business owners, expressed frustration over the stricter requirements and said that the P500,000 daily cash limit could disrupt operations and delay payments to suppliers."
Sentiment is yet to diffuse into economic numbers, but our underlying methodological individualist deductive reasoning is on the right track.
IX. The War on Cash Disguised as Corruption Control
One of the critical elements in the BSP withdrawal cap is its requirement that the public use ‘traceable channels.’
The “traceable channels” clause reveals the BSP’s dual intent.
On media, it’s about anti–money laundering and transaction transparency. In practice, it forces liquidity to remain inside the banking perimeter—deposits, e-wallets, and interbank transfers that cannot exit as cash.
Cash, the last bastion of transactional privacy and immediacy, is being sidelined. This is not a war on crime; it’s a war on cash.
The effect is to
silo money within the formal system, preventing it from circulating freely
across the real economy.
Figure 6
In August, cash-to-deposit at 9.84% remained adrift near all-time lows, while the liquid-asset-to-deposit ratio at 47.72% hit 2020 pandemic lows—both trending downward since 2013. (Figure 6, topmost pane)
X. From Cash Limits to Systemic Liquidity Locks
What looks like a compliance reform is, in truth, a liquidity containment measure.
By capping withdrawals at Php 500,000, the BSP traps liquidity in banks already facing balance sheet strain. This buys temporary stability, allowing institutions to meet reserve ratios and avoid visible stress, but it starves the cash economy—especially small businesses dependent on operational liquidity.
Economic losses eventually translate to non-performing loans, erasing whatever short-term relief liquidity traps provided. When firms struggle to repay, banks hoard liquidity to protect themselves—contracting credit and deepening the slowdown. The policy cure becomes the crisis catalyst.
XI. The Liquidity Containment Playbook and the Architecture of Control
This is not an isolated act; it fits a broader policy playbook:
- Easy Money Policies: Reduce the cost of borrowing in favor of the largest borrowers, often at the expense of savers and small lenders.
- CMEPA: The Capital Market Efficiency Promotion Act, which expands regulatory reach over capital flows and market behavior, while rechanneling private savings toward state and quasi-state instruments.
- Soft FX Peg: The USDPHP peg, designed to constrain inflation, masks currency fragility and limits monetary flexibility.
- Price Controls: MSRP ceilings distort price signals and suppress market clearing, especially in essential goods.
- Administrative Friction: Regulatory hurdles replace fiscal support, extracting compliance and liquidity rather than injecting relief.
Add to that the BSP’s ongoing yield curve-shaping—suppressing long-term yields to sustain public debt rollover—and what emerges is a clear strategy of financial containment: liquidity is captured, redirected, and immobilized to defend a strained financial order.
XII. Curve-Shaping and Fiscal Extraction
The post–rate cut yield curve behavior in the Philippines reveals a dual narrative that’s more tactical than organic. On one hand, the market is signaling unease about inflation—particularly in the medium term—yet it stops short of pricing in a runaway scenario. This ambivalence is reflected in the belly of the curve, where yields have dropped sharply despite flat month-on-month CPI and only modest year-on-year upticks. (Figure 6, middle and lowest graphs)
On the other hand, the BSP appears to be engineering a ‘bearish steepening’ through tactical easing, likely aimed at supporting bank margins and stimulating credit amid a backdrop of rising NPLs, slowing loan growth, and liquidity hoarding.
The rate cut, coming on the heels of July’s CMEPA and amid regulatory tightening, suggests a deliberate attempt to offset balance sheet stress without triggering overt inflation panic.
Each of these measures—cash caps, regulatory absorption of savings, and engineered curve shifts—forms part of a single containment architecture. What looks like fragmented policy is, in reality, coordinated liquidity triage.
In sum, fiscal extraction, liquidity controls, and curve manipulation are now moving in tandem. Each reinforces the other, ensuring that capital cannot easily escape the system even as trust erodes.
The war on cash, then, is not about corruption or transparency—it’s about preserving liquidity in a system that has begun to run dry.
XIII. When Discretion Becomes Doctrine: From Institutional Venality to Kindleberger’s Signpost
And then the BSP hopes to expand its extraction-based “reform.” This ABS-CBN article reports that the central bank plans to issue "a new policy on a possible threshold for money transfers which will cover even digital transactions." It would also empower banks to "refuse any transaction based on suspicion of corruption."
Ironically, BSP Governor Eli Remolona cited as an example a contractor’s ‘huge’ withdrawal from the National Treasury—deposited into a private account—which he defended as "legitimate."
The war on financials is evolving—from capital controls to behavioral nudging to arbitrary discretionary thresholds. BSP’s move to cap money transfers reframes liquidity as suspicion, and banks as moral adjudicators.
Discretion to refuse transactions—even without proof—creates a regime where access to private property is conditional, not on law, but on institutional discomfort.
Remolona’s defense of a bank that released a “huge amount” to a contractor despite unease confirms what we’ve recently argued: the scandal was never hidden—it was institutionally tolerated.
Bullseye!
Two revelations from this:
First, it validates that this venal political-economic framework represents the tip of the iceberg—supported by deeply entrenched gaming of the system, extraction, and control born of top-heavy policies and politics.
Two. It serves as a Kindleberger’s timeless signpost—that swindles, fraud, and defalcation are often signals of crashes and panic:
"The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut, induce still more to cheat in order to save themselves. And the signal for panic is often the revelation of some swindle, theft, embezzlement, or fraud." (Kindleberger, Bernstein)
In this sense, the BSP’s moralistic posture and arbitrary discretion may not be acts of reform, but symptoms of a system inching toward its own reckoning. The façade of prudence conceals a liquidity-starved order struggling to maintain legitimacy—where control replaces confidence, and “reform” becomes a euphemism for survival.
All this suggests that, should implementation be rigorous, the recent earthquakes may not be confined geologically but could spill over into financial institutions and the broader economy. If these signify a “do something” parade of ningas cogon policies, then the moral decay born of the public spending spree will soon resurface.
Either way, because of structural sunk costs, the effects of one intervention diffusing into the next guarantees the acceleration and eventual implosion of imbalances that—like a pressure valve—will find a way to ventilate.
XIV. Conclusion: The Technocrat’s Mirage: Goldilocks Confronts the Knowledge Problem and Goodhart’s Law
Finally, the BSP admits to either being afflicted by a knowledge problem or propagating a red herring: "We’re still refining our estimates. We had thought that our Goldilocks policy rate was closer to 5 percent, now it’s closer to 4 percent. So we have to decide where we really are between 5 percent and 4 percent."
This confession exposes the technocratic folly of believing that economic equilibrium can be engineered by formula. It ignores the fundamental truth of human action—there are no constants—and the perennial lesson of Goodhart’s Law: when a measure becomes a target, it ceases to be a good measure. Protecting the status quo, therefore, translates to chasing short-term fixes while evading long-term consequences.
What this reveals is not calibration but confusion—policy reduced to trial-and-error within a liquidity-starved system. The “Goldilocks” rhetoric masks a deeper instability: that each attempt to fine-tune the economy only amplifies the distortions born of past interventions.
We close this article with a quote from our October issue:
"The irony is stark. What can rate cuts achieve in “spurring demand” when the BSP is simultaneously probing banks and imposing withdrawal caps?
And more: what can they do when authorities themselves admit that CMEPA triggered a “dramatic” 95-percent drop in long-term deposits, or when households are hoarding liquidity in response to new tax rules—feeding banks’ liquidity trap?"
____
References
Ludwig von Mises, Bureaucracy, p.119 NEW HAVEN YALE UNIVERSITY PRESS 1944, mises.org
Hyman P. Minsky, The Financial Instability Hypothesis The Jerome Levy Economics Institute of Bard College, May 1992
Charles P Kindleberger & Peter L. Bernstein, The Emergence of Swindles, Manias Panics and Crashes, Chapter 5, p.73 Springer Nature link, January 2015
Prudent Investor Newsletter, The Philippine Flood Control Scandal: Systemic Failure and Central Bank Complicity, Substack, October 5, 2025
Prudent Investor Newsletter, Q2–1H Debt-Fueled PSEi 30 Performance Disconnects from GDP—What Could Go Wrong, Substack, August 24, 2025
Prudent Investor
Newsletter, Minsky's
Fragility Cycle Meets Wile E. Coyote: The Philippine Banking System’s Velocity
Trap, Substack,
September 14, 2025
No comments:
Post a Comment