Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? (2nd of 3 Part Series)

 

In the course of history various commodities have been employed as media of exchange. A long evolution eliminated the greater part of these commodities from the monetary function. Only two, the precious metals gold and silver, remained. In the second part of the 19th century, more and more governments deliberately turned toward the demonetization of silver. In all these cases what is employed as money is a commodity which is used also for nonmonetary purposes. Under the gold standard, gold is money and money is gold. It is immaterial whether or not the laws assign legal tender quality only to gold coins minted by the government—Ludwig von Mises 

This post is the second in a three-part series 

In this Issue 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order?

I. Global Central Banks Have Driven Gold’s Record-Breaking Rise

II. A Brief Recap on Gold’s Role as Money

III. The Fall of Gold Convertibility: The Transition to Fiat Money (US Dollar Standard)

IV. The Age of Fiat Money and the Explosion of Debt

V. Central Banks: The Marginal Price Setters of Gold

VI. Is a U.S. Gold Audit Fueling Record Prices? 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? 

The second part of our series examines the foundation of the global economy—the 54-year-old U.S. dollar standard—and its deep connection to gold’s historic rally. 

I. Global Central Banks Have Driven Gold’s Record-Breaking Rise 

Global central banks have played a pivotal role in driving gold’s record-breaking rise, reflecting deeper tensions in the global financial system. 

Since the Great Financial Crisis (GFC) of 2008, central banks—predominantly those in emerging markets—have significantly increased their gold reserves, pushing levels back to those last seen in 1975, a period just after the U.S. government severed the dollar’s link to gold on August 15, 1971, in what became known as the Nixon Shock. 

This milestone reminds us that the U.S. dollar standard, backed by the Federal Reserve, will mark its 54th anniversary by August 2025.

Figure 1

The accumulation of gold by central banks, particularly in the BRICS nations, reflects a strategic move to diversify away from dollar-dominated reserves, a trend that has intensified amid trade wars, sanctions, and the weaponization of finance, as seen in the freezing of Russian assets following the 2022 Ukraine invasion.  (Figure 1, upper window)

The fact that emerging markets, particularly members of the BRICS bloc, have led this accumulation—India, China, and war-weary Russia have notably increased their gold reserves, though they still lag behind advanced economies—reveals a growing fracture in the relationship between emerging and advanced economies.  (Figure 1, lower graph and Figure 2, upper image)  

Figure 2

Additionally, their significant underweighting in gold reserves suggests that BRIC and other emerging market central banks may be in the early stages of a structural shift. If their goal is to reduce reliance on the U.S. dollar and close the gap with advanced economies, the pace and scale of their gold accumulation could accelerate (Figure 2, lower chart)

Figure 3

As evidence, China’s central bank, the People’s Bank of China (PBOC), continued its gold stockpiling for a fourth consecutive month in February 2025. (Figure 3, upper diagram)

Furthermore, last February, the Chinese government encouraged domestic insurance companies to invest in gold, signaling a broader commitment to gold as a financial hedge. 

This divergence underscores a deepening skepticism toward the U.S.-led financial system, as emerging markets seek to hedge against geopolitical and economic uncertainties by strengthening their gold reserves 

In essence, gold’s record-breaking rise may signal mounting fissures in today’s fiat money system, fissures that are being expressed through escalating geopolitical and geoeconomic stress. 

II. A Brief Recap on Gold’s Role as Money 

To understand gold’s evolving role, a brief historical summary is necessary. 

Alongside silver, gold has spontaneously emerged and functioned as money for thousands of years. Its finest moment as a monetary standard came during the classical gold standard (1815–1914), a decentralized, laissez-faire regime in Europe that facilitated global trade and economic stability. 

As the great dean of the Austrian School of Economics, Murray Rothbard, explained, "It must be emphasized that gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium. Above all, the supply and provision of gold was subject only to market forces, and not to the arbitrary printing press of the government." (Rothbard, 1963) 

However, this system was not destined to endure. The rise of the welfare and warfare state, supported by the emergence of central banks, led to the abandonment of the classical gold standard. 

As Mises Institute’s Ryan McMaken elaborated, "This system was fundamentally a system that relied on states to regulate matters and make monetary standards uniform. While attempting to create an efficient monetary system for the market economy, the free-market liberals ended up calling on the state to ensure the system facilitated market exchange. As a result, Flandreau concludes: ‘[T]he emergence of the Gold Standard really paved the way for the nationalization of money. This may explain why the Gold Standard was, with respect to the history of western capitalism, such a brief experiment, bound soon to give way to managed currency.’" (McMaken, March 2025) 

The uniformity, homogeneity, and growing dependency on the state in managing monetary affairs ultimately contributed to the classical gold standard’s demise. 

III. The Fall of Gold Convertibility: The Transition to Fiat Money (US Dollar Standard) 

World War I forced governments to abandon gold convertibility, leading to the adoption of the Gold Exchange Standard—where only a select few currencies, such as the British pound (until 1931) and the U.S. dollar (until 1933), remained convertible into gold. 

Later, the Bretton Woods System attempted to reinstate a form of gold backing by pegging global currencies to the U.S. dollar, which in turn was tied to gold at $35 per ounce. 

However, rising U.S. inflation, fueled by fiscal spending on the Vietnam War and social welfare programs, combined with the Triffin dilemma, led to a widening Balance of Payments (BoP) deficit. Foreign-held U.S. dollars exceeded U.S. gold reserves, threatening the system’s stability. 

As economic historian Michael Bordo explained: "Robert Triffin (1960) captured the problems in his famous dilemma. Because the Bretton Woods parities, which were declared in the 1940s, had undervalued the price of gold, gold production would be insufficient to provide the resources to finance the growth of global trade. The shortfall would be met by capital outflows from the US, manifest in its balance of payments deficit. Triffin posited that as outstanding US dollar liabilities mounted, they would increase the likelihood of a classic bank run when the rest of the world’s monetary authorities would convert their dollar holdings into gold (Garber 1993). According to Triffin, when the tipping point occurred, the US monetary authorities would tighten monetary policy, leading to global deflationary pressure." (Bordo, 2017)

Bretton Woods required a permanently loose monetary policy, which ultimately led to a mismatch between U.S. gold reserves and foreign held dollar liabilities. 

To prevent a run on U.S. gold reserves, President Richard Nixon formally ended the dollar’s convertibility into gold on August 15, 1971, ushering in a fiat money system based on floating exchange rates anchored to the U.S. dollar. 

IV. The Age of Fiat Money and the Explosion of Debt 

With the shackles of gold removed, central banks gained full control over monetary policy, leading to unprecedented levels of inflation and political spending. Governments expanded their fiscal policies to fund not only the Welfare and Warfare State, but also the Administrative/Bureaucratic State, Surveillance State, National Security State, Deep State, Wall Street Crony State, and more. 

The most obvious consequence of this system has been the historic explosion of global debt. The OECD has warned that government and bond market debt levels are at record highs, posing a serious threat to economic stability. (Figure 3, lower chart) 

V. Central Banks: The Marginal Price Setters of Gold 

Ironically, in this 54-year-old fiat system, so far, it is politically driven, non-profit central banks—rather than market forces—that have become the marginal price setters for gold. 

Unlike traditional investors, central banks DON’T buy gold for profit, but for political and economic security reasons. 

The World Gold Council’s 2024 survey provides insight into why central banks continue to accumulate gold: "The survey also highlights the top reasons for central banks to hold gold, among which safety seems to be a primary motivation. Respondents indicated that its role as a long-term store of value/inflation hedge, performance during times of crisis, effectiveness as a portfolio diversifier, and lack of default risk remain key to gold’s allure." (WGC, 2024) 

This strategic accumulation reflects a broader trend of central banks seeking to insulate their economies from the vulnerabilities of the fiat system, particularly in an era of heightened geopolitical risks and dollar weaponization.

Figure 4 

The Bangko Sentral ng Pilipinas (BSP) has historically shared this view. (Figure 4, upper graph) 

In a 2008 London Bullion Management Association (LBMA) paper, a BSP representative outlined gold’s importance in Philippine foreign reserves—a stance that remains reflected in BSP infographics today. 

Alas, in 2024, following criticism for being the largest central bank gold seller, BSP reversed its stance. Once describing gold reserves as "insurance and safety," it now dismisses gold as a "dead asset"—stating that: "Gold prices can be volatile, earns little interest, and has storage costs, so central banks don’t want to hold too much." 

This shift in narrative conveniently justified BSP’s recent gold liquidations. 

Yet, as previously noted, history suggests that BSP gold sales often precede peso devaluations—a warning sign for the Philippine currency. (Figure 4, lower window)

VI. Is the Propose U.S. Gold Audit Help Fueling Record Prices? 

Finally, could the Trump-Musk push to audit U.S. gold reserves at Fort Knox be another factor behind gold’s rally? 

There has long been speculation that U.S. Treasury gold reserves, potentially including gold stored for foreign nations, have been leased out to suppress prices.

Figure 5

Notably, Comex gold and silver holdings have spiked since these audit discussions began. Gold lease rates rocketed to the highest level in decades last January. (Figure 5, top and bottom charts) 

With geopolitical uncertainty rising, central bank gold buying accelerating, and doubts growing over fiat stability, gold’s record-breaking ascent may be far from over. 

Yet, it’s important to remember that no trend goes in a straight line.

___

References 

Murray N. Rothbard, 1. Phase I: The Classical Gold Standard, 1815-1914, What Has Government Done to Our Money? Mises.org 

Ryan McMaken, The Rise of the State and the End of Private Money March 25,2025, Mises.org 

Michael Bordo The operation and demise of the Bretton Woods system: 1958 to 1971 CEPR, Vox EU, April 23, 2017 cepr.org 

World Gold Council, Gold Demand Trends Q2 2024, July 30,2024, gold.org

June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'?

 

The current political status quo, however, is built around protecting investors—rather than the taxpayers who ultimately pay all the bills—from risk. This method of turning debt into inflation is attractive to governments and their Wall Street enablers because it shifts the burden of runaway spending to ordinary savers and consumers who pay the real price of de facto inflationary default through price inflation, unaffordable homes, stagflation, and falling real wages—Ryan McMaken 

In this issue

June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'?

I. Global Central Banks Predominantly on an Easing Trajectory

II. The BSP’s Programming of the Inflation Narrative via the Confirmation Bias

III. Widening Inequality: Headline CPI vs. Bottom 30% CPI Hits 22-Year High!

IV. June’s Demand Side Disinflation: Non-Performing Loans Surge in May

V. Escalating Deficit Spending as a Floor on the CPI; Will Belated Rate Cuts Sow the Seed of the Next Wave of Inflation?

June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'?

The decline in June CPI was broad-based and signifies primarily a demand-side factor. And with global central banks on an easing spree, will this and deficit spending anchor the "Marcos-nomics stimulus"?

I. Global Central Banks Predominantly on an Easing Trajectory

Figure 1

Easy money policies have made a dramatic comeback, and charts reveal that global central banks have been reinforcing the market's propensity for leveraged speculative activities.

For the first time since October 2020, the Bank of America (BofA) reports that there were zero rate hikes from central banks last June. (Figure 1, topmost and middle charts)

Ironically, even as inflation has yet to be fully contained or subdued, this aggregate easing trajectory reinforces the path dependency of authorities, primarily in support of the swelling of government control of the economy channeled through the rapid expansion in deficit spending (partly via the war economy), boosting asset prices which serve as collateral, and the backstopping of systemic leveraging (debt expansion).  

In the same vein, the uptrend in US government deficit spending should serve as a template for the world. (Figure 1, lowest image) 

In the Asian region, governments like Thailand (USD 13.5 billion for household debt relief), South Korea (USD 18 billion for Micro Businesses), and Indonesia (USD 28 billion-Free Meal for schools) have been rolling out various forms of politically targeted subsidies in "support of the economy." 

II. The BSP’s Programming of the Inflation Narrative via the Confirmation Bias 

The Philippine June CPI data illustrates such conditions from the lens of the Philippine political economy. 

Business Times/ Reuters July 5, 2024: PHILIPPINE annual inflation was at 3.7 per cent in June, easing from the previous month on a slower increase in utility costs, the statistics agency said on Friday. The rate, which was below the 3.9 per cent forecast in a Reuters poll, brought the average reading in the six months to June to 3.5 per cent, within the central bank’s 2 to 4 per cent target range. The Philippine central bank said inflation was expected to have settled between the 3.4 to 4.2 per cent range in June. 

This outlook represents an update of our June 10th post, predicting the temporary peak of the recent bounce in inflation.

Firstly, the Bangko Sentral ng Pilipinas (BSP) exercises significant control over the inflation narrative.

Before releasing the Consumer Price Index (CPI) data, the BSP projects a path that serves as the basis for consensus estimates, representing the survey's "normal distribution."

While media outlets focus on the BSP's annual targets when reporting CPI numbers, the public often overlooks the deviation of the consensus median estimate from the actual outcome. It also discounts their flawed predictive track record.

The selective attention from the "pin the tail on the donkey" approach perpetuates "confirmation bias," reinforcing the public's preconceived notion that authorities have complete control over the economy.

III. Widening Inequality: Headline CPI vs. Bottom 30% CPI Hits 22-Year High!

Next, authorities bask in the glow of reported slowdown in inflation, they quickly claim credit or take a victory lap.

Inquirer.net, July 5, 2024: The lower inflation rate registered in June — at 3.7 percent — is proof that the administration’s economic policies have been effective, House of Representatives Speaker Ferdinand Martin Romualdez said on Friday.

However, few notice that data from the Philippine Statistics Authority (PSA) reveals a different story—this includes officials. 

In fact, it shows that inflation has had an adverse impact on households at the bottom 30%, leading to a widening inequality gap.

Figure 2 

The gap between the national CPI and the CPI of households in the bottom 30% has surged to its highest level since the post-Asian crisis in 2002! (Figure 2, topmost graph) 

While the bottom 30% buys goods at the same prices from the same stores as everyone else, their higher inflation rate highlights the disproportionate loss of purchasing power against goods and services.

The slowdown in the statistical inflation rate has barely alleviated conditions, affecting not only the lowest-income households but also average households, while elites benefit from direct access to the formal banking system and capital markets to safeguard their assets.

Evidence?

Including government external borrowings, FX deposits in Philippine banks have soared to Php 3.324 trillion in May 2024, marking the third-highest level recorded, in tandem with the surging US dollar-Philippine peso pair. (Figure 2, top and middle windows) 

Given the low penetration levels of formal finance and financial literacy, this surge in FX deposits could be interpreted as FX "speculation" by elites and upper echelons of households within the BSP’s jurisdiction. 

Amazing, right?

IV. June’s Demand Side Disinflation: Non-Performing Loans Surge in May

Authorities may view the slowing inflation rate as an accomplishment, but the easing of the CPI is likely to slow further for several politically unpalatable reasons:

Figure 3

One. The PSA's CPI month-on-month rate continues to decline, in contrast to its strengthening which had backed the previous uptrend in the CPI. (Figure 3, upper chart) 

Two. Outside of food CPI, there has been a sustained moderation of the Core (non-food and non-energy inflation) which posted a steady 3.1% in June. Importantly, prices have been falling across the board. Paradoxically, food inflation has been moderating globally. (Figure 3, lower diagram)

Figure 4 

Three. Philippine treasury traders have bet against inflation. T-bill rates have been coming off their recent highs, and the narrowing of the treasury curve or a "bullish flattening" has highlighted weaker inflation and slower GDP growth, supporting the BSP's desired rate cuts. (Figure 4, top and bottom charts)

Four. While the slowing inflation rate has been perennially sold to the public as a supply-side phenomenon, the real story is that this represents a demand-side downturn. 

For instance, in June, we pointed out the surge in consumer credit card and salary loan non-performing loans (NPLs) in Q1 2024. These NPLs have now surfaced to the "core" from the "fringes." 

Businessworld, July 5, 2024: THE BANKING INDUSTRY’S nonperforming loan (NPL) ratio soared to a near two-year high in May, data from the Bangko Sentral ng Pilipinas (BSP) showed. The Philippine banking industry’s gross NPL ratio rose to 3.57% in May from 3.45% in April and 3.46% a year ago. This matched the 3.57% ratio in July 2022. It was also the highest in 23 months or since 3.6% in June 2022.

The BSP data on the banking system’s selected performance indicators confirm our view that the accelerating accounts of consumer borrowings (and businesses) have been used to roll over or refinance existing record debt rather than for consumption.

Therefore, refinancing has been used by the banking system to conceal the mounting liquidity and solvency issues that are plaguing it. 

We are oblivious to the actual numbers of "zombie" institutions, which survive by constantly rolling over debt and remaining afloat solely through the accumulation of debt. 

Aside from relief measures and regulatory subsidies, the banking system continues to accumulate imbalances, exacerbated by the BSP's pseudo "tightening" policies, which are actually easy money policies. 

In reality, the BSP cannot afford to "tighten" as it did in 2018, as it would risk triggering a domino effect or contagion due to the growing liquidity and solvency issues. 

The Philippine economy and financial system have been gradually devolving into a Ponzi finance-economy. (Prudent Investor, 2024)

Figure 5

Aside from the historic high of held-to-maturity (HTM) assets, rising non-performing loans (NPLs) could exacerbate liquidity tightening in the banking system and exert pressure on banks' accounting profits. (Figure 5, topmost chart)

Loan growth in the banking system has declined in similar fashion to 2018-19, with NPLs on the rise following rate hikes from the increase in the CPI.  (Figure 5, middle and lowest graphs)

Rising NPLs would not only slow loan growth but also negatively impact banks' investment portfolios, increase credit risks, and deteriorate asset quality, ultimately affecting capital conditions. 

While the BSP has employed various regulatory and liquidity measures to disguise the decaying conditions in the banking system, eventually, the chickens come home to roost or these measures will eventually prove ineffective.

Figure 6

Haven’t you noticed? Banks have been increasing their borrowings from the public. While they market these as 'green' or 'sustainable' bonds to piggyback on politically favored themes, they are essentially debt. 

At Php 1.398 trillion, the banking system's outstanding bills and bonds have nearly reached Php 1.44 trillion—levels similar to those seen in 2019 (pre-pandemic). (Figure 6, upper diagram) 

Of course, everyone calls this "sound banking"…until it isn’t. 

The government will release labor data tomorrow, on July 8th. 

Other economic sensitive data, such as external trade and manufacturing, have yet to be released. 

Nonetheless, the S&P Global PMI reported a softening of the manufacturing conditions last June. (bold added) 

The first half of 2024 ended with a further improvement in operating conditions across the Filipino manufacturing sector, as per the latest PMI® data by S&P Global. Output and purchasing activity rose at accelerated rates. However, June marked a notable slowdown in new orders growth. Moreover, manufacturing companies in the Philippines continued to reduce their backlogs, and further trimmed back their staffing levels. Turning to prices, despite a fresh rise in cost burdens, the rate of input price inflation remained weaker than that seen historically. Meanwhile, charges were raised at a softer pace in June. The headline S&P Global Philippines Manufacturing PMI – a composite single-figure indicator of manufacturing performance – fell to a three-month low of 51.3 in June, from 51.9 in May. (S&P Global, July 2024) 

The Philippine PMI seems to have been plagued by a "rounding top." (Figure 6, lower image) 

A slowdown in credit usage by businesses and households will likely exert downward pressure on inflation and GDP.  

V. Escalating Deficit Spending as a Floor on the CPI; Will Belated Rate Cuts Sow the Seed of the Next Wave of Inflation?

On the other hand, inflation could find a floor from the ramping up of deficit spending. 

May's expenditure was historic as it almost reached the three-year streak of record-breaking December levels. 

For instance, the Philippine government proposes to import costly fighter jets, which, if pursued, would swell trade deficits and increase the need for external borrowings, potentially further weakening the Philippine peso. Instead of pursuing this path, it might be more effective to focus on resolving territorial disputes via negotiations. 

It's as if these jets would make a significant difference in deterrence and actual combat. 

Figure 7

Nevertheless, helped by May's expenditure-driven budget deficit, May’s public debt soared by 8.9% YoY and 2.2% MoM to a record Php 15.35 trillion in May.

The all-time high in public debt was primarily fueled by a surge in foreign debt (up 8.8% YoY and 4.2% MoM) that spiked its share of the total from 31.4% to 32%. (Figure 7, topmost graph) 

It is no surprise that public debt dynamics are correlated with the USD/Philippine peso exchange rate, as well as with the CPI. (Figure 7, middle image) 

Alongside the transformation of the banking system's business model towards consumer spending, the trickle-down "spending one’s way to prosperity" economic development paradigm focuses on centralizing the economy via the credit-financed record savings-investment gap, channeled through the "twin deficits." This translates to an increasing reliance on foreign savings. 

Subsequently, the deepening reliance on credit increases the incentives for the BSP to ease its monetary policies. 

This also implies that the USDPHP rate is driven nearly entirely by the policy path, as confirmed by data, rather than monetary policy differences between the Fed and BSP. 

With global central banks easing, the BSP can justify its shift to an accommodative stance. 

And as noted earlier, the BSP easing and increased public spending in support of GDP growth could signify the "Marcos-nomics stimulus." 

In light of this, the Philippines would most likely join the ranks of its neighbors in throwing down the gauntlet of stimulus. 

It wasn't until a single 100-basis-point rate cut that the CPI began to rise, accelerate, and sow the seeds of the present 9-year CPI trend. (Figure 7, lowest chart) 

Are we witnessing a repetition of the inflation cycle? 

___

References 

Ryan McMaken, Three Lies They’re Telling You about the Debt Ceiling May 23, 2023, Mises.org 

Prudent Investor, Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024! June 10, 2024  

S&P Global, Production growth sustained, although underlying demand trends soften S&P Global Philippines Manufacturing PMI July 01, 2024 PMI.SPGLOBAL.com

 

US Sanctions Russia’s Gold Miners: A War Against Global Central Banks Accumulation of Gold?

Are the sanctions on Russian gold miners aimed at slowing global central bank purchases of gold?

This short post deals with the growing trend of global fragmentation or de-globalization. 

The above sanctions on Russian gold miners translate to the increasing weaponization of natural resources, which could lead to more resource nationalism.

 

And the injunction does not seem to be directed only against Russia—the 2nd largest producer w/ a 10% share of world production—but implicitly also against buyers/consumers of gold. 

 

Since central banks have been significant buyers of gold—which hit a record last 2022—as shown by the chart from the Economist—the intent of this prohibition could be to slow its accumulation. 

Could this signify a countermeasure against the mounting activities of the Global South to establish a rival currency against the US dollar standard?

And as the chart of @VCElements also shows, Australia, Canada & US have only an aggregate 22% share of total production, which means the Global South/emerging markets control the rest. 

The escalation of sanctions could lead to more supply constraints, which scarcity could fuel higher prices as intensifying uncertainties could increase demand for gold. 

The 56-Year Philippine Inflation Cycle, December Headline and Core CPI Reinforce the Return to the Age of Inflation

 

When you want to help people, you tell them the truth. When you want to help yourself, you tell them what they want to hear—Thomas Sowell 

 

In this issue 

 

The 56-Year Philippine Inflation Cycle, December Headline and Core CPI Reinforce the Return to the Age of Inflation 

I. Is the Worst Over? The Political Spin on Inflation 

II. Will History Rhyme? How the GDP Responded to the 2008 CPI and Policy Rates 

III. The Completion of the 56-Year Inflation Cycle 

IV. The Age of Inflation: The Three Waves of a Subcycle 

V. The Era of Disinflation.  Inflation and Disinflation’s Impact on the GDP and the Main Street 

VI. Why Inflation is Embedded into the Financial and Economic System?  

VII. December Headline and Core CPI Reinforce the Return to the Age of Inflation 

VIII. Demand Side Inflation: Near Record Public Spending, Historic Consumer and Financial Industry Bank Loans! 

 

The 56-Year Philippine Inflation Cycle, December Headline and Core CPI Reinforce the Return to the Age of Inflation 

 

Has inflation peaked?   Even if true, it should represent a temporary one.  The public appears to have forgotten the cyclical nature of inflation. 

 

I. Is the Worst Over? The Political Spin on Inflation 

 

Sure, past performance doesn't guarantee future returns.  But the adage "history may not repeat itself, but it often rhymes" has epistemic value too.  

 

In finance, their vital difference stems from comparing the end itself, the periodical payoffs/rate of returns, and the means used to attain an end that resulted in a semblance of patterns in outcomes.  

 

Here is the thing.   Using historical accounts, how relevant are the mainstream's optimistic prognostications of the economy and financial markets for 2023? 

 

For instance, authorities recently declared that "the worst is over."  But what is the basis for such an assertion?  Because recent activities represent the norm?  

 

Yet, when people reason from price/numerical changes, such declarations are likely prone to fallacies.  

 

Could their "economic" forecasts have tacitly been about political agenda? Or is the mainstream selling "politics" cloaked with economic parlance? 

 

In doing so, authorities attempt to assuage the public by saying what the public wants to hear.    

 

In conjunction, "animal spirits" play a crucial backbone of their brand of economics.   They believe that with enhanced confidence, the public will open their wallets and spend. 

 

But how effective is putting a political spin on economic issues? 

II. Will History Rhyme? How the GDP Responded to the 2008 CPI and Policy Rates 

 

To begin with, the Philippine government's measure of inflation, the CPI, recently spiked to reach a 14-year high. Aside, BSP policy rates also rose to 2008 levels.  

 

Using history as a guide, how did the domestic economy react under similar conditions? 

 

Figure 1 

The 2008 CPI spike, aggravated by the contagion effects of the US-centered Great Recession, pulled lower the GDP in 2009. (Figure 1, upper window) 

 

At the brink of a recession, authorities embarked on a combination of measures to ease credit through BSP rate cuts and implement the Economic Resiliency Plan or a fiscal bailout package worth Php 330 billion consisting of tax cuts and increased welfare and infrastructure spending.  

 

Back then, a critical ramification of the 1997 Asian Crisis was to cleanse the balance sheet of the private and public sectors.  As such, the stimulus resulted in a sharp rebound of the financial markets and the economy. 

 

In contrast, current economic and financial conditions have become more fragile than in the years that led to the Great Recession. 

 

Aside from domestic vulnerabilities, the global economy and financial markets have been reeling from intense disruptions caused by the overlapping and entwined amalgamation of critical forces, which includes: 

 

-the spikes in inflation and the subsequent credit tightening measures by central banks that have popped unprecedented asset and credit bubbles, 

-the kinetic war in Europe and the risks of expanding the theater of war in different places (Taiwan, Serbia-Kosovo, Azerbaijan-Armenia, Greece-Turkey, Iran and the Middle East, among others), 

-expanded protectionism covering the economic, financial, and monetary spheres,   

-the intertemporal repercussions of supply-side dislocations and capital losses from the unprecedented responses to the pandemic and,  

-the realignment of spheres of influence by the competing global hegemons 

 

In this line, the sagacious Zoltan Pozsar of Credit Suisse identifies 'six' tension points in the geopolitical sphere that should impact the global economy unfavorably. 

 

I identified six fronts (meaning “hot wars”) in “macro-land” (a “cold place”) where Great Powers were going “at it” in 2022: the G7’s financial blockade of Russia, Russia’s energy blockade of the EU, the U.S.’s technology blockade of China, China’s naval blockade of Taiwan, the U.S.’s “blockade” of the EU’s EV sector with the Inflation Reduction Act, and China’s “pincer movement” around all of OPEC+ with the growing trend of invoicing oil and gas sales in renminbi. Those were six geopolitical events in one single year, that is, a geopolitical curveball to deal with every two months (Pozsar, 2023) 

 

More aggravations could be the highlight of 2023. 

 

The intensifying cumulative tensions have stretched the global economic uncertainty index to an unparalleled degree. (Figure 1, lower window) 

 

As such, the global economy teeters with a recession, with a third of the global economy at risk, predicts the head of the IMF. 

 

That is to say, the proverbial "Damocles sword" of stress and tensions hangs over the global financial markets and economy through multiple epicenters! 

 

And considering the underlying fragilities of a debt-based global finance and economy, such magnifies the risks of contagions. 

 

So, will the global shades of 2008 influence or affect the Philippine economy? 

 

III. The Completion of the 56-Year Inflation Cycle 

 

When it comes to the Philippine inflation cycle, the mainstream silence on this resembles a black hole. 

 

Instead of "transitory," inflation operates on several "waves" that can last for decades.  Its underlying "subcycles" represents a composite of its defining age. 

 

For instance, as shown above, in the eon of disinflation, the Philippine CPI rose from 2003 and climaxed in 2008—representing a two-wave, five-year countercyclical dynamic.  

And that was only a sample. 

Figure 2 

In the context of the inflation cycle, the CPI has operated in two divergent eras during the last 56 years. (Figure 2, upper window) 

 

The first is the inflation era of 1958 to 1986 (28 years). 

 

The second is the disinflation age of 1987 to 2015 (28 years).  

 

As a side note, the term "disinflation" represents a smokescreen.  Yes, the rate of price increases slows, but it still strips the people of the purchasing power of their currency.   

 

And this represents the boiling frog syndrome:  A frog put into boiling water would jump out to try to save itself, whereas a frog placed into gradually heated cool water will be boiled alive. 

 

Eerily, the "full" 56-year cycle represented an evenly split (28-year) period.  

 

IV. The Age of Inflation: The Three Waves of a Subcycle 

 

If my crystal ball works, 2015 or 2016 could mark the turning point toward the second inflation era. 

 

Why the inflection point of 2016? (Figure 2, lower pane) 

 

The CPI began its upswing seeded from its crucial trough in 2015, wherein the CPI registered two months of deflation. 

 

And subsequently, the energized momentum from 4Q 2019 (second wave) onwards prompted a breakout from its critical resistance levels. 

 

Should the CPI break beyond the August 2008 high of 10.5%, it would reinforce the secular uptrend.  

 

Nevertheless, subcycles have defined the age of inflation.  And the underlying subcycles were characterized by three volatile "waves" of inflation.  

 

From an annual perspective, monthly volatilities interspersed the uptrend of the CPI from 1958-1986. 

 

Figure 3 

Three major subcycles have underpinned the age of inflation: 1958-1965, 1966-1975, and 1976-1986. (Figure 3, first two rows) 

 

After reaching a "higher high," each subcycle peaked and transitioned to a new phase.   

 

The end stage of the 1976-1986 subcycle culminated with a Balance of Payment (BoP) crisis.  This crisis sent the CPI into an upward spiral and the economy into a 2-year recession. 

 

This cycle also featured the transition from the age of inflation to the era of disinflation. 

 

If the present phase represents the second wave of the new subcycle, how low and how long will the pullback last before the "third wave" spike? (Figure 3, second to the top right window)  

V. The Era of Disinflation.  Inflation and Disinflation’s Impact on the GDP and the Main Street 

 

On the other hand, the age of disinflation featured "lower highs" of the CPI, which climaxed with the 2003-2008 episode. 

 

How did the two eras (inflation and disinflation) differ? 

 

Strikingly, the 28 years of inflation produced a real GDP CAGR of 4.0473%, while the eon of disinflation had a CAGR of 4.4027%, for a paltry .3554% a year differential!  (Figure 3, last two rows) 

 

And yet, a major financial crisis and an economic recession hampered the nation in the age of inflation. 

 

But it is not about statistics. 

Figure 4 

-The age of inflation powered the USD peso on an uptrend until the present. (Figure 4, topmost pane) 

 

-The age of inflation spawned a diaspora of many residents and begot human exports (labor migration) via OFWs. (Figure 4, second to the top pane) 

 

VI. Why Inflation is Embedded in the Financial and Economic System?  

 

Please remember that the CPI, as a government-calculated number, is likely underreported.   

 

Besides, since there is no objective measure of utility, and where averaging different goods and services represents an apples-to-oranges calculation, the CPI is a misleading political rather than economic metric. Price controls and other changes in the statistical calculation (for example, rebasing) also add to the distortions of the CPI. 

 

The bottom line is official policy embodies inflation through the monetary or demand-side framework.    

 

Proof? The anchor of the BSP monetary policy is "inflation targeting"—it is not to eradicate inflation but to "manage" it.  

 

Unfortunately, since 2015, the inflation genie just cracked out of its lamp. 

 

There is more.  The global shift in the monetary regime from the gold exchange standard (Bretton Woods) to the fiat standard through the Nixon Shock (which repealed the convertibility of gold) has been instrumental in shaping policies that amplified the impact of inflation and disinflation here and elsewhere. 

 

We are witnessing the belated effects of the seismic monetary experiments dealt with us by global central banks.  

 

As such, inflation will remain embedded in the political-economic system until forced by economics to unravel and prompt a policy reversal.   

 

In reaction to the recent inflation spikes, central banks resorted to global rate hikes (courtesy of Topdown charts) representing partial evidence of such policy turnabout.  Most of the global central banks have been tightening. (Figure 4, second to the lowest pane) 

 

But given the path dependency of monetary policymakers, this gamut of actions is likely provisional. Once recessionary forces become apparent, the path-dependent action of global central banks is to resort to financial easing. But previous outcomes from these might not be the same today. 

 

That said, it is natural to see a pullback in the CPI as part of the non-linearity of trends and in reaction to the central bank action signifying the partial withdrawal of monetary accommodation through tightening.  But again, this policy of backpedaling may not last. 

 

Again, if I am correct that the Philippines has recidivated to the "inflation age," then a retreat in the CPI (which signals the end of the second wave) will be followed by a "third wave" that will be marked by a "higher high."  And that the likely terminal phase for the first subcycle will be anytime between 2024-2026. 

 

Will history rhyme? 

 

VII. December Headline and Core CPI Reinforce the Return to the Age of Inflation 

 

Philippine authorities declared that the December CPI inched higher at 8.1%. 

 

As usual, rising food, other food-related prices, and utility bills have signified the culprit. 

 

Yet, perpetually fixating on the supply side, what we hear from the officialdom and media has mainly signified "noise."  It is a pathetic attempt to divert the public's attention from its authentic sources or the "signal."  

 

On the face of it, for the mainstream, perhaps the slowdown in the CPI is not just to validate their predictions but also to vindicate incumbent policies. 

 

More importantly, the underlying design must be the revival of the easy money regime to inflate the credit bubble economy, which facilitates invisible redistribution in favor of the bureaucracy and the elites. 

 

Not just that.  For them, with the entrenched structural imbalances in the economic and financial system, there is too much at stake. And dependency translates to the desire for policy continuity. 

 

In this context, instead of adaptability in confronting change, the mainstream adamantly wants "to fight the last war."  

 

Despite the diversions to blame the public, the December CPI triggered another potential alarm. 

 

Unlike the headline CPI, which remains distant from the milestone of August 2008, the CORE CPI (6.9%) has almost equaled its high of the same period (7.23%).  (Figure 4, lowest pane) 

 

Strangely, despite the alleged supply-side aberrations, the BSP says that it is "ready to take all policy action necessary," which implicitly means taking further restrictive measures on the demand side. 

 

Right. Blame supply while taking measures on demand. 

 

VIII. Demand Side Inflation: Near Record Public Spending, Historic Consumer and Financial Industry Bank Loans! 

 

Figure 5 

Aside from near record credit financed fiscal deficits (via public spending; figure 5, topmost pane), demand-side factors of inflation include "1) spillover effects of 2020 BSP's historic injections to rescue the banking system, 2) the May 2022 election money, and 3) the substantial drawdown in bank savings. And the most conspicuous factor has been 4) the explosive growth in consumer borrowing from banks!" (Prudent Investor, 2022) 

 

The streaking hot growth spike of salary loans persisted in December!  It jumped by 67.2%, its fourth consecutive month of over 50% growth. (Figure 5, second to the highest pane) 

 

And while the media radiates a sense of delight over growing bank loans defying economic gravity, they forgot to mention that household credit, through record (peso & % share) credit card loans (up 26.5% in December), continues to outperform supply-side credit. (Figure 5, second to the lowest pane) 

 

Aside from the mounting leverage of the household balance sheets intended to fill in the shrinking purchasing power of the peso, the interest rate cap on credit cards has ballooned the demand for it. (Prudent Investor, 2022)  

 

In turn, the household credit share of the aggregate banking loans continues to climb at the expense of the production loans.  And even from this perspective, "too much money chasing too few goods" have become evident. (Figure 5, lowest window) 

 

And for good measure, the GDP has become increasingly dependent on liquidity growth or monetary inflation.  

Figure 6 

 

Although the money supply growth rate has recently tempered, its share of the GDP remains close to the historic levels of 2022.  (Figure 6, top left window) 

 

As it is, the GDP has become almost entirely reliant on credit expansion from the banking system and BSP.  (Figure 6, top right window) 

 

So how can this not be structurally "inflationary?" 

 

Likewise, rising prices of financial assets, which emit signs of monetary loosening, represent another factor that could abet the demand side of inflation.  

 

The banking system's loans to the financial sector have emerged as one of the biggest growth centers.   Its share of the total is adrift at all-time highs, boosted by a sharp upturn in growth fueled by the BSP's unprecedented liquidity injections.  (Figure 6, second to the lowest pane) 

 

Coinciding with the steep rebound of the PSEi 30 has been the recent rebound in bank loans to the sector since 2021. (Figure 6, lowest window) 

 

Have these signified intra-industry margin trades to "push" asset prices as the stock market via the PSEi 30?  

 

Again, why shouldn't there be a structural relapse to an era of inflation when authorities have become dependent on the printing press for its economic growth paradigm? 

 

Again, to be sure, the CPI may see an interim peak sometime in 2023, but that would represent a countercyclical trend than a return to the era of disinflation. 

 

___ 

 

References 

 

Pozsar, Zoltan War and Peace Credit Suisse Economics, January 6, 2023 

 

Prudent Investor, November CPI Spikes to 14-Year Highs! Inflating Away the Record Public Debt Levels! Consumer Leveraging Rockets! December 11, 2022 

 

Prudent Investor, The BSP Extends Credit Card Interest Rate Cap Amidst Another "Aggressive" Hike in Policy Rates, November 20, 2022