Philippine Oil Shock Politics Meets Systemic Fragility: Crisis Without a Crisis and a Deepening Web of Interventions

 

The picture of the free market is necessarily one of harmony and mutual benefit; the picture of State intervention is one of caste conflict, coercion, and exploitation—Murray N. Rothbard

 In this issue:

Philippine Oil Shock Politics Meets Systemic Fragility: Crisis Without a Crisis and a Deepening Web of Interventions

I. Crisis Without a Crisis

II. Oil Shock Politics and Organized Interests

III. The Ratchet Effect of Crisis Policy

IV. The Oil Shock Is Already Affecting the Real Economy

V. When Price Signals Are Suppressed

VI. Interventions Beget Interventions

VII. Markets Are Already Responding

VIII. Conclusion: Deepening Interventions Intensify Systemic Fragility 

Philippine Oil Shock Politics Meets Systemic Fragility: Crisis Without a Crisis and a Deepening Web of Interventions 

“Crisis Without a Crisis”: As officials urge calm, subsidies, price caps, and emergency policies spread across the economy. 

I. Crisis Without a Crisis 

The Marcos administration is urging the public not to panic: "Everything is normal. No need to hoard." 

Officials have repeatedly warned consumers against hoarding while insisting that the Philippine economy remains stable despite the surge in global oil prices. 

Yet the government’s own policy actions suggest a very different reality. 

Within days of the oil shock, authorities introduced a rapidly expanding set of interventions across multiple sectors of the economy: 

• fuel subsidies for transport operators, with discussions of extending support to commuters
• suspension of public transport fare increases
• 50 percent fare discounts for MRT and LRT passengers
• suspension of toll rate hikes and applying steep discounts
• investigations into gasoline stations accused of overpricing, imposing early unauthorized price hikes, and carrying out sudden closures
• voluntary price freezes from processed food manufacturers
• discussions on imposing price caps on imported rice
• plans to suspend mandatory biofuel blending requirements
• and signals from the Palace that a state of emergency remains under consideration 

At the same time, the political debate is widening. 

Senator Tito Sotto has filed legislation to repeal the Oil Deregulation Law, while economist Winnie Monsod has proposed a wealth tax to finance expanding subsidies. 

Taken together, these measures resemble a broad attempt to suppress the transmission of rising energy costs throughout the economy. 

But the deeper story may lie in the political incentives behind such policies. 

II. Oil Shock Politics and Organized Interests 

The response to the oil shock reflects dynamics long described by political economist Mancur Olson. 

In Olson’s theory of collective action, small, well-organized interest groups often exert disproportionate influence over economic policy. Because their benefits are concentrated while the costs are widely dispersed, these groups are able to secure subsidies, protections, or regulatory advantages from government. 

Energy shocks tend to accelerate this process. Some examples: 

• Transport operators seek subsidies to offset fuel costs.
• Food producers lobby for relief from input price pressures.
• Agricultural sectors push for price supports.
• Infrastructure operators also seek regulatory relief when shocks threaten profitability. 

For instance, the Energy Regulatory Commission (ERC) is considering power rate adjustments in April that would allow utilities to recover rising generation costs and financial losses. Similar pressures have already appeared in earlier policy discussions—from real property tax (RPT) relief for power producers to increased GEA-All subsidies benefiting renewable producers, as well as negotiated asset transfers in the SMC–Meralco–AEV energy deal—illustrating how fragile sectors increasingly rely on regulatory protection when market conditions deteriorate. 

Each group frames its demands as necessary for stability, employment, or consumer protection. 

The result is an expanding patchwork of sector-specific interventions. 

Individually, each measure may appear justified. Collectively, however, they create a growing system of economic management in which prices and incentives are increasingly shaped by political decisions rather than market signals. The result is an expanding patchwork of sector-specific interventions. Intensifying competition for public resources drives rising demands for government spending, crowding out the productive economy and accelerating the centralization of the economy. 

III. The Ratchet Effect of Crisis Policy 

Economic historian Robert Higgs described a recurring pattern in government responses to crises: what he called the "ratchet effect." 

During emergencies—wars, financial crises, pandemics, or commodity shocks—governments introduce extraordinary interventions to stabilize politically sensitive sectors of the economy. These measures are typically framed as temporary responses to exceptional circumstances. 

Yet once the crisis subsides, the state rarely returns fully to its previous size or scope. 

Instead, some interventions remain in place, while others leave behind new fiscal commitments, regulatory authorities, or political expectations of continued support. Each crisis therefore pushes the boundary of government involvement forward in a stepwise fashion—much like a mechanical ratchet that moves only in one direction. 

The Philippines’ pandemic episode illustrates this dynamic clearly.

Figure 1

During the COVID crisis, fiscal deficits widened to record levels, justified as emergency stimulus designed to cushion the economic collapse. (Figure 1, upper window) 

Yet much of that spending expansion became structurally embedded in the fiscal framework. Political pressures for continued subsidies and transfers, created under the purview of social democratic free-lunch politics, have made these programs difficult to unwind even after the emergency has passed. 

As a result, the country’s savings–investment gap widened to unprecedented levels, financed by historically high public borrowing and still-elevated liquidity conditions, as reflected in measures such as the M2-to-GDP ratio. These dynamics have increased the economy’s sensitivity to inflation while intensifying crowding-out pressures already evident in domestic output, consumption, and credit markets. 

Energy shocks historically amplify this ratchet dynamic. 

Subsidies introduced to stabilize transport costs become permanent programs. Temporary price controls evolve into long-term regulatory oversight. Emergency fiscal transfers create new political expectations that governments will shield key sectors from market fluctuations.

The Philippine response to the current oil shock risks reinforcing this pattern. Policies such as fare subsidies, price caps, toll suspensions, and regulatory enforcement may begin as short-term measures to contain inflation and social unrest. 

But once introduced, they often prove politically difficult to reverse. 

Over time, repeated crisis interventions accumulate into a broader system of economic management—expanding the role of the state while leaving the underlying structural vulnerabilities unresolved. 

IV. The Oil Shock Is Already Affecting the Real Economy 

Signs of strain were emerging. 

Automobile sales had already begun to decline, even before the latest surge in oil prices, suggesting that rising fuel costs have yet to add to the erosion of discretionary consumption. (Figure 1, lower chart) 

Transport activity is now reflecting the same pressures. 

Reports indicate that the MMDA expects vehicle traffic in Metro Manila to decrease by around 30,000 units. Meanwhile, bus trips at the Parañaque Integrated Terminal Exchange (PITX) have dropped significantly, as operators scale back services and commuters reduce their travel. 

Air travel is also absorbing the shock. Airlines have begun imposing higher jet fuel surcharges, raising the cost of domestic and international flights. 

The shock is also beginning to affect overseas labor flows. Filipino workers continue to be repatriated from conflict areas in the Middle East, with roughly 2,000 overseas Filipino workers (OFWs) already returning to the country. While still modest in scale, such movements highlight another channel through which geopolitical shocks can affect the Philippine economy. Remittances from OFWs have long served as a stabilizing source of foreign exchange for the peso. Disruptions to overseas employment—particularly in energy-sensitive regions—therefore risk amplifying pressures already visible in labor, currency and financial markets. 

These adjustments illustrate the normal transmission mechanism of an energy shock: rising fuel prices ripple through transport, logistics, and consumer spending. 

Instead of allowing those adjustments to occur through price changes, the government is intervening across multiple points in the transmission chain. 

V. When Price Signals Are Suppressed 

Economists such as Friedrich von Hayek emphasized that prices function as a decentralized information system: "the knowledge of the particular circumstances of time and place." 

Prices communicate knowledge about scarcity, costs, and consumer preferences across millions of economic actors. 

When governments suppress those signals—through fare freezes, price caps, subsidies, or regulatory pressure—the information embedded in prices becomes distorted. 

Consumers may continue to demand goods whose true costs are rising. 

Producers may reduce supply when prices no longer cover costs. 

Adjustments that would normally occur through prices instead emerge as reduced service, shortages, declines in quantity or quality, and even fiscal transfers. 

In this sense, partial price controls recreate elements of the problem identified by Ludwig von Mises in his critique of socialist planning: when prices are manipulated, rational economic calculation becomes increasingly difficult. As the great Mises explained, 

Without calculation, economic activity is impossible. 

VI. Interventions Beget Interventions 

Once price controls begin to distort economic signals, additional interventions often follow. 

This dynamic was emphasized by Murray Rothbard, who argued that government interventions frequently generate secondary effects that policymakers then attempt to correct with further interventions. 

• Fare caps create losses for transport operators, prompting subsidies.
• Price freezes create supply pressures, prompting enforcement actions.
• Rising fiscal costs generate calls for new taxes or regulatory changes. 

Each policy attempts to fix the unintended consequences of the previous one. 

Over time, what begins as a limited intervention can evolve into a broad regime of economic management, representing a gradual transition toward centralization. As the dean of Austrian economics, the great Murray Rothbard wrote,

Whenever government intervenes in the market, it aggravates rather than settles the problems it has set out to solve. This is a general economic law of government intervention. 

VII. Markets Are Already Responding 

While policymakers attempt to stabilize prices and shield consumers from the oil shock, financial markets appear to be reacting to the broader macroeconomic implications.

Figure 2

The PSEi 30, the primary equity benchmark of the Philippine Stock Exchange, has declined, although the drop has been relatively muted—likely reflecting institutional support and collateral management dynamics. (Figure 2, topmost graph) 

Other markets are sending a more cautionary signal. The peso has weakened significantly, with the USD/PHP exchange rate reaching a record high of 60.1 this week, making it one of the worst-performing currencies in Asia. 

At the same time, the government bond market has undergone a structural shift. 

Philippine Treasury yields have moved from bearish flattening to bearish steepening, with long-term yields rising faster than shorter maturities over the past week. Such shifts often reflect growing concerns about inflation persistence, fiscal sustainability, or sovereign risk. (Figure 2, lower chart)

Figure 3

As of March 19, Philippine 10-year Treasuries ranked as the worst-performing bond market segment in Asia (Figure 3, upper table) 

Although the current spike in T-bill yields may not yet prompt a response from the BSP, it is important to note that its policies are shaped more by market developments than by its own actions. The directional movement of one-month T-bill yields has historically preceded BSP policy shifts, including rate cuts in 2018 and 2023–2024, and rate hikes in 2022. (Figure 3, lower image) 

Thus, if the upward trajectory of T-bill rates persists, rate hikes are likely to come onto the BSP’s radar.

Figure 4

These concerns are not unfounded. The Philippines already faces record debt-service burdens amid persistent fiscal deficits. (Figure 4, topmost pane) 

Expanding subsidies and price controls risk adding further pressure on the government’s balance sheet. 

According to ADB data, the Philippines has recorded the largest increase in credit default swap (CDS) spreads since the outbreak of the Middle East conflict—indicating that markets are pricing in higher default risk for Philippine debt. (Figure 4, middle and lower charts)

VIII. Conclusion: Deepening Interventions Intensify Systemic Fragility 

What is unfolding may not simply be a temporary response to a spike in global oil prices. 

Rather, the episode illustrates how modern interventionist economies evolve when confronted with external shocks. 

As Mancur Olson observed, mature political systems tend to accumulate powerful distributional coalitions—organized groups capable of securing targeted protections, subsidies, and regulatory advantages from the state. Energy shocks often accelerate this process as sectors facing sudden cost increases mobilize to shift those costs elsewhere. 

The result is a widening network of state interventions designed to stabilize politically sensitive sectors. 

But crisis interventions rarely remain temporary. Economic historian Robert Higgs described this dynamic as the ratchet effect: during periods of emergency, governments expand their role in managing the economy, and once the crisis passes, those powers rarely return fully to their previous limits. 

Each shock therefore leaves behind a larger structure of fiscal commitments, regulatory authority, and political expectations of continued support. 

Once prices begin to be suppressed in this way, the informational role of markets deteriorates—a problem emphasized by Friedrich Hayek. Prices no longer convey reliable signals about scarcity and cost, making economic coordination increasingly difficult. 

This is where the broader critique developed by Ludwig von Mises becomes relevant. When governments repeatedly intervene to correct the unintended consequences of earlier policies, economic management gradually expands across more sectors of the economy. Mises described this process as the dynamic of interventionism—a cycle in which policy distortions generate new problems that invite further intervention. 

The Philippine response to the oil shock increasingly reflects this pattern. 

• Fare caps require subsidies.
• Price freezes invite enforcement.
• Rising fiscal costs trigger proposals for new taxes or regulatory changes. 

Each populist band-aid policy attempts to stabilize the distortions created by the previous one. 

What emerges is not a single intervention but an expanding system of economic management—one reinforced by the ratchet effect of successive crises. 

And when such systems face external shocks—particularly commodity shocks that simultaneously affect inflation, trade balances, and fiscal accounts—the pressures tend to migrate toward the weakest macroeconomic points: the government’s fiscal position, the sovereign debt market, and the currency. 

The oil shock may therefore be revealing something deeper about the Philippine economy. 

Rather than simply confronting higher energy prices, policymakers appear to be navigating the accumulated tensions of an interventionist regime already stretched across multiple sectors—and increasingly across the economy as a whole. 

Suppressing the immediate price effects of the shock may buy time—but it also risks amplifying underlying maladjustments. 

Importantly, it cannot eliminate the adjustment the economy must eventually make. At best it postpones that process, increasing the risk that the eventual correction will be larger and more disorderly. 

And markets—especially currency and sovereign bond markets—tend to recognize that reality long before policymakers do.

 

Philippine Core CPI Forged a New 22-year High! Signs of Peak 2nd Wave Inflation: Pullback in Bank Lending and BSP Injections

 

 

So now we see, at last, that the business cycle is brought about, not by any mysterious failings of the free market economy, but quite the opposite: By systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and, when the inflation comes to an end, the subsequent depression-adjustment comes into play.—Murray N. Rothbard 

 

In this issue 

Philippine Core CPI Forged a New 22-year High!  Signs of Peak 2nd Wave Inflation: Pullback in Bank Lending and BSP Injections 

I. While the February CPI Slipped, Core Inflation Forged a New 22-year High! The Futility of the Inflation Task Force  

II. Rate Hikes Barely a Hurdle on the Insatiable Desire to Expand Deficit Spending 

III. Defying Rate Hikes: Credit Card and Salary Loan Growth Sizzled Fueling Inflation as Bank Savings Stagnates 

IV. Credit Card Debt Fueled Segments of Core Inflation; The Invisible Redistribution  

V. Peak Second Inflation Wave?  The Law of Demand: Has the BSP’s Rate Hikes Started to Impact Quantity of Loans? 

 

Philippine Core CPI Forged a New 22-year High!  Signs of Peak 2nd Wave Inflation: Pullback in Bank Lending and BSP Injections 

 

Philippine headline CPI barely changed in February, while Core CPI sprinted to a 22-year high!   But has this inflation cycle peaked?  Clues from banks and the BSP suggest it has. 

I. While the February CPI Slipped, Core Inflation Forged a New 22-year High! The Futility of the Inflation Task Force  

 

The consensus appears to be celebrating the unexpected "easing" or "moderation" of the CPI. 

 

GMA News, March 7: Inflation or the rate of increase in the prices of goods and services moderately slowed down in February, thanks to the slower movement in transportation and fuel costs, the Philippine Statistics Authority (PSA) reported on Tuesday. The headline inflation or the rate of increase in the prices of products and services in the country decelerated to a rate of 8.6% in February 2023. Year-to-date inflation print stood at 8.6%, according to the PSA chief. 

 

However, insisting that this remains a supply-side phenomenon, authorities pushed to establish a "task force" to tackle inflation. 

 

Inquirer.net, March 8: In a brief statement, Presidential Communications Secretary Cheloy Velicaria-Garafil said Mr. Marcos approved the proposals “in general.” Diokno said that among the measures was the establishment of an interagency committee to monitor prices, agricultural production, and food supply to help the government decide when is the right time to import. Secretary Arsenio Balisacan of the National Economic and Development Authority (Neda) noted that the creation of the high-level committee was urgent. 

 

Figure 1  

 

But while the 8.6% February CPI was lower than consensus expectations, it was slightly down from the 8.7% in January. 

 

Most importantly, while addressing food inflation signified the objective of the proposed creation of the "task force," the February non-food and non-energy 7.8% CORE CPI rocketed to a new 22-year high! (Figure 1, topmost chart) 

 

It means that inflation has diffused beyond the corridors of food and energy!  

 

Further, though the CPI rate may decline, it doesn't mean inflation is falling.   It pertains to the continuing erosion of the purchasing power of the peso but at a slower pace.    

 

From January 2012 through January 2023, the peso has shed 31% of its purchasing power.  (Figure 1, second to the highest window) 

 

Hence, January 2023 peso, assuming its proximity to reality, is worth 69 cents of the 2012 peso.  Analogous to the boiling frog syndrome, the peso is gradually being burned at the people's expense.   

 

And this is hardly good news for the average citizen.  It is good news for the government and the elite borrowers. 

 

Nonetheless, have you noticed that "imported inflation" has vanished from the script of the consensus? 

 

Why so?  

 

Because the prices of the "external" factors—oil and USD Php—have significantly declined!  Yet the headline and the core CPI remained stubbornly elevated. (Figure 1, second to the lowest and lowest charts) 

 

This omission reveals the constant shifting of goalposts by authorities. 

 

That’s not all. Let us not forget that there are distortions in the calculation of statistical inflation, which include price controls, base rates used, biases in conducting surveys, and others.  The context here translates to the understatement of the CPI. 

 

Yet, while remaining reticent on demand, authorities have been implicitly signaling to the public that "greed" by unspecified private economic agents has signified the source of inflation.  That is, the government is "good," while the private sector is "bad."  

 

Hence, it is their duty to instill order in their constituencies through mandates and controls.   

 

Sad to see that even from the supply side, officials with economic backgrounds fail to comprehend that competition on itself should contain "greed." 

 

Bluntly, the task force will be assigned to implement centralized controls of the national supply chain. 

 

The thing is, authorities assume that they possess what the great Friedrich von Hayek called "knowledge of the particular circumstances of time and place" in real-time covering the spectrum of all required food supplies to meet dynamic demand. 

 

But they admit to reactionary impulses when stating that the intent of monitoring is "to help the government decide when is the right time to import."   

 

So prices would still escalate before they respond, which also extrapolates to a time-consuming process.  And by the time they act, price pressures from feedback loops might have spread to the other sectors.  

 

The recent experience highlights this phenomenon.  

 

Yet, their assumptions have another critical flaw.  It omits the future—changing individual preferences, economic conditions, exchange rates, international food prices, availability of supplies, weather, and agricultural variable, among many other factors. 

 

To ram this knowledge problem point home, their inability to know the shifting preferences and values of individuals, which shapes economic calculation that drives exchanges, highlights the vulnerability of central planners to policy errors. 

 

Or whatever centralized task they are duty-bound to do is destined for failure. 

 

The fact that they have kept the public in the dark about the contributions of demand tells us that their proposed policies intend to show the voting public that they are "doing something."  

  

It stands to reason that the clamor for creating a task force to contain inflation is about public signaling to gain popular political support. 

 

In any case, our role is to bridge this analytical void.   

 

II. Rate Hikes Barely a Hurdle on the Insatiable Desire to Expand Deficit Spending 

 

Last week, we elaborated on how deficit spending fuels inflation. (Prudent Investor, 2023) 

 

This week we are told of the planned ambitious deficit spending programs for 2023, including the Php 9 trillion in infrastructure spending projects.  

 

And then there is the Php 1,000 inflation subsidy or cash transfer program for the 9.3 million belonging to the "poorest of the poor."  

 

Basically, such projects signify "throwing money" at different targeted political groups, which are popularly rationalized as meant "for the greater good."  But this translates to expanding the deficit spending—all dependent on a cheap money regime. 

 

Additionally, authorities appear to be exhausting their balance sheet capacity even when the GDP remains "hot."   What happens when recessionary forces become apparent?   

 

Would authorities be forced to amplify their fiscal "stabilizers" even at the risk of blowing up street inflation? 

 

Will the age of inflation become entrenched through such actions? 

 

III. Defying Rate Hikes: Credit Card and Salary Loan Growth Sizzled Fueling Inflation as Bank Savings Stagnates 

 

But there is more.  

Aside from deficit spending, increases in the money supply from bank credit expansion are likewise inflationary.  

 

Naturally, when increases in money supply through bank credit expansion—are unsupported by increases in production—this brings about economic imbalances.  Yes, inflation.  

 

Proof? 

 

Figure 2 

 

The rate of change in the lending of all banks (Universal-Commercial, Thrift, and Rural/Cooperative) have been congruent with the gyrations of the CPI. (Figure 2, highest window) 

 

Total bank lending grew by 10.9% in January, down slightly from 11.3% a month ago.   In contrast, there was a sharp deceleration of bank lending of the Universal-Commercial banks (UC), which logged in at 10.21% in January from 13.54% in December.   

 

In short, the bank lending of the thrift and rural banks carried the torch of inflation last January.  And part of this borrow-spend phenomenon may have spilled over to February. 

 

Interestingly, the % share of the credit card portfolio of the total banking system (UC, thrift and rural/cooperatives) stormed to a record high of 4.9% in January! (Figure 2, second to the highest chart) 

 

This record upsurge also reflected the activities of the dominant Universal and Commercial banks, which pushed the % share of the credit cards to the aggregate UC lending to a milestone high of 5.2%! (Figure 2, second to the lowest pane) 

 

Partly due to the interest rate cap and mainly because of the reduction in purchasing power of the peso, credit card expansion has transformed into a potent driver of price inflation.    

 

Credit cards have principally powered consumer lending—the latter's share of bank lending has been soaring too! 

 

The explosive growth of the salary loan portfolio of the UC banks, which soared by 67.05% in January, the second highest rate after November 2022, also supported credit card growth and general household loans (excluding real estate).  (Figure 2, lowest window)  

 

Figure 3  

 

Incorporating household real estate loans, the consumer loans pie relative to the total loan portfolio swelled to 19.25% in Q4 2022, the third highest since Q3 2020! (Figure 3, topmost chart) 

 

That’s not all.  

 

Fundamentally, the structural transformation in the distribution of UC bank lending supports the adage "too much money chasing too few goods." 

 

The rapidly rising share of consumer loans to the aggregate UC bank lending relative to industry loans indicates more credit-financed consumer spending at the expense of supply-side financing. (Figure 3 middle window) 

 

Or, banks have been lending more to the consumers (demand) while industry loans (supply) have underwhelmed.   

 

So with more money funding consumption than production (ceteris paribus), wouldn't that lead to inflation? 

 

As a caveat, yes, it is true that consumer loans (ex-real estate) account for only about 5% of the overall lending activities—it is easy to be misled by simplistic analysis of statistics—but indebtedness covers about half of the households primarily through informal channels, according to the Financial Inclusion data of the BSP.   

 

So, while savings have financed part of it, we can only infer that the principal source of informal credit transactions has been (formal) bank credit expansion.  

 

Besides, the savings account of the banking system has been stagnating; it posted a paltry .1% growth last January, its fourth month out of the last five of non-growth! (Figure 3, lowest chart)  

 

While some may be transferring their peso savings into Time Deposits or FX deposits, peso savings represent about 38% of bank deposit liabilities and 28.5% of total liabilities last January. 

 

So the declining growth of savings has likely signified a drawdown.  The public has been consuming their corn seeds. 

 

Or, the public has been drawing from their savings account to finance the plunging purchasing power of the peso. It also exposes the trend of diminishing productivity underpinning the economy.   

 

Given that savings are finite, what happens when the sustained drawing results in a depletion?  

 

"Resilient" consumers? "Sound macro," really? 

 

IV. Credit Card Debt Fueled Segments of Core Inflation; The Invisible Redistribution  

 

It is interesting to observe in the February CPI data that the whizzing prices of core segments—housing and utilities, furnishing and household equipment, and personal care and miscellaneous goods—have been in tandem with credit card growth.  

 

So, have those with access to credit cards been driving up the prices of these non-core items?  

 

And as primary spenders of newly infused money, these buyers benefited from prices at the time of their purchases, while subsequent buyers pay at higher prices.  This process effectively transfers purchasing power to credit card buyers.  And proof of redistributing wealth from the poor to the rich...

Figure 4 

 

Housing and utilities, furnishing and household equipment, and personal care and miscellaneous goods posted a CPI of 8.6%, 6.2%, and 5.3% last February.  (Figure 4, topmost and second to the highest windows) 

 

Utilities and furnishing pivoted higher along with the inflection and recovery of credit card growth from deflation in Q1 2021.  

 

No wonder sales of a listed member of the PSEi 30 member boomed as credit card growth and the CPI spiked in 2022. (Prudent Investor, 2023) 

 

It showcases the invisible resource transfer explicitly described by JM Keynes. (bold mine) 

 

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth. (Keynes, 1919) 

 

Unfortunately, to quote the late American economist Herb Stein, "If something cannot go on forever, it will stop." 

 

V. Peak Second Inflation Wave?  The Law of Demand: Has the BSP’s Rate Hikes Started to Impact Quantity of Loans? 

 

The law of demand tells us that as the price of credit increases, its effect on demand for credit will be a reduction in quantity.   

 

But the impact of the recent BSP monetary policies will have to blend in with other forms of existing interventions, such as liquidity injections, FX market interventions, and various relief measures and more. 

 

It means that rate hikes under this setting will have a time-inconsistency effect—adjustments over the conflicting new and incumbent policies could materialize over different time periods. 

 

The BSP started its aggressive rate hikes in May 2022.  Yet, bank loan growth accelerated over the last nine months.  It was in January 2023 when signs of a credit growth slowdown emerged.   

 

And history hasn't rhymed.  Bank lending began to decline as the CPI pushed higher and ahead of the BSP rate hikes in 2018, which escalated its cascade.   

 

The difference in the reaction of lenders today lies with other embedded policies. 

 

Except for consumer spending, the supply-side Universal-Commercial bank credit growth rate materially declined last January.  Even blazing consumer credit has emitted signs of exhaustion. (Figure 5, topmost chart) 

 

In any case, due to the plunge in auto loans (-4.4%), the UC consumer YoY and MoM growth rates last January plummeted to 20.26% and -.6% from 25.12% and 1.74% in December, respectively. (Figure 4, second to the lowest window) 

 

The BSP and the consensus didn't see the inflation coming.  Through the present, they continue to deny it.  This denial only shows the reactionary nature of their policies.  

 

My humble guess is that they are clueless about the effects of the inflation "cat-and-mouse game" which they underwrote—such that they will have little idea of the unintended consequence of their rate hikes.  

  

Despite the relief measures, January NPLs have begun to rise.  (Figure 4, lowest window) 

Figure 5 

During the 2015-2018 inflation episode, credit card delinquency rose along with the CPI.  It worsened when the CPI fell! (Figure 5, second to the highest pane) 

 

The waterfall in bank lending/rise in NPLs signified diminishing demand, which authorities covered with aggressive deficit spending.  

 

The important thing to drive at is that the present decline of the NPLs has not been a consequence of balance sheet recovery but from the subsidies of the BSP—particularly the variable relief measures and liquidity interventions. 

  

Once credit delinquency growth gains upside momentum, we can only surmise what the BSP will do and the nature of their response/s given the latest actions as our blueprint.  

  

And yes, we may be seeing peak inflation for this second wave.  The first wave was in 2015-2018.  The cracks in bank lending have emerged while Treasury markets exhibit a sharp tightening. (Figure 5, second to the lowest pane) 

 

Furthermore, both banks and the BSP have scaled down their liquidity interventions.  The BSP has reversed most of the December injections. (Figure 5, lowest chart) 

  

But the coming CPI slowdown may be a transition to a more potent third wave—all of which will be anchored on the path dependency politics of deficit spending by the executive branch and the priority of maintaining and expanding liquidity by the BSP. 

 

Plus ça change, plus c'est la même chose.  

 

Or, the more things change, the more they remain the same.  

____ 

References 

 

Prudent Investor, Q4 2022’s Historic Deficit Spending! Economic Freedom Rating Plunged Due to Fiscal Health, The Inflationary Financing of Deficits March 5, 2023 Substack, Blogger 

 

Prudent Investor, The Wilcon Depot Boom: A Beneficiary of Government Induced Inflation? Substack, Blogger March 6, 2023 

 

Keynes, John Maynard, Keynes on Inflation Excerpts from The Economic Consequences of the Peace by John Maynard Keynes, 1919. pp. 235-248 pbs.org