The Political Economy of Corruption: How Social Democracy Became the Engine of Decay

 

In a world of uncertainty, no one knows the correct answer to the problems we confront and no one therefore can, in effect, maximize profits.  The society that permits the maximum generation of trials will be the most likely to solve problems through time (a familiar argument of Hayek, 1960).  Adaptive efficiency, therefore, provides the incentives to encourage the development of decentralized decision-making processes that will allow societies to maximize the efforts required to explore alternative ways of solving problems—Douglass North 

In this issue

The Political Economy of Corruption: How Social Democracy Became the Engine of Decay 

Part I: How Social Democracy Sows the Seeds of Corruption

IA. Corruption Starts with the Electoral Process

IB. Public Choice Theory and Barangay Projects: Microcosm of the National Rent Machine

IC. A Caveat: Between System and Choice

ID. Dynasties, and the Patron–Client Trap, From Adaptive to Extractive Efficiency

IE. Goodhart’s Law and the Metric Illusion: Governance by the Numbers

IF. The Limited Access Orders: Elite Stability Through Controlled Competition

IG. The Financialization of Patronage

IH. Ochlocratic Democracy and the Squid Game Parable

II. The Tragic Paradox of Philippine Social Democracy

Part II: The Political Economy of Corruption

IIA. The Pandora’s Box of Public Spending

IIB. The Fiscal Mirage: Bigger Budgets, Shrinking Revenues

IIC. The Economic Undercurrent: A Slowdown Beneath the Noise

IID. The Policy Backlash: Easy Money Meets Fiscal Decay

IIE. The Mirage of Deficit-to-GDP Ratio: When Optics Replace Substance

IIF. The Mirage of Prudence: Debt, Deception, and the Ochlocratic State

Part III: Conclusion: The Final Drift: From Rent-Seeking to Crisis 

The Political Economy of Corruption: How Social Democracy Became the Engine of Decay 

From ballot to budget, the Philippine political economy drifted from progress to patronage—where fiscal populism and elite collusion sustain the illusion of democracy 

Part I: How Social Democracy Sows the Seeds of Corruption 

IA. Corruption Starts with the Electoral Process

Figure 1

Corruption begins not in backroom deals—but at the ballot box. 

How much does a candidate spend to get elected? 

While formal spending limits exist under law, field estimates and media-monitoring data reveal that actual campaign expenditures, especially at the national level, reach hundreds of millions to billions of pesos. In urban settings, Barangay officials reportedly spend upwards of Php 500,000, city councilors tens of millions, and candidates for national seats billions. (Figure 1) (see reference) 

Given their modest stipends, what motivates them and their backers to pour in such vast sums? Patriotism? Or the expectation of returns—through power, access, and extraction? 

IB. Public Choice Theory and Barangay Projects: Microcosm of the National Rent Machine 

Here, Public Choice Theory—or as the late Economist James Buchanan artfully defined it—"politics without romance," strips away the illusion of altruistic politics. (see reference) 

Elections, far from being contests of ideals, are investments in rent-seeking. Politicians rationally pursue interventions—public works, subsidies, welfare programs—that expand budgets and open opportunities for returns. 

Barangay officials, for instance, may build health centers or basketball courts to tout “accomplishments,” while pocketing funds through overpricing, commissions, or other channels within their networks. 

At the grassroots, popular barangay projects—covered courts, health stations, road repairs—serve dual purposes: visible service and invisible extraction. These projects justify budget allocations while enabling leakage through padded contracts and favored suppliers. The barangay becomes a microcosm of the national rent machine. 

That is, the larger the government’s footprint, the larger the potential rents.

Fiscal expansion is often framed as developmental necessity. In reality, it’s a mechanism for rent distribution. More projects mean more contracts, more intermediaries, more leakage—and most importantly, more VOTES.

Politicians push for interventions not to solve problems, but to create extractive opportunities and extend their tenure.

IC. A Caveat: Between System and Choice

As a caveat, while the seeds of corruption are sown in the electoral system—where incentives reward control, manipulation, and extraction through patron–client ties and dependency-building programs—individual agency still matters. Not all who enter the system succumb to its temptations.

We must resist the fallacy of division: the idea that because the system is corrupt, every actor within it must be. While many—or even most—may exploit the structure, others attempt to navigate it with integrity, often at great personal and political cost.

Moreover, corruption is not monolithic. Its degree, visibility, and method vary:

• At the barangay level, corruption may be more modest—petty overpricing, padded logistics, or informal commissions.
• At the national level, it scales. Many officials may not directly pocket funds from projects. Instead, some exploit indirect mechanisms—through layered corporate networks, proxy ownerships, and business interests within their jurisdictions.

In such cases, transparency tools like the SALN (Statement of Assets, Liabilities, and Net Worth)—while symbolically important—often remain cosmetic. They measure disclosure, not control. As such, they are easily gamed, rarely enforced, and structurally blind to the artifice of legally structured beneficial ownership. 

ID. Dynasties, and the Patron–Client Trap, From Adaptive to Extractive Efficiency

Over time, this incentive structure breeds dynastic entrenchment. Voters become dependent on welfare, contracts, and subsidies—reinforcing the very system that sustains them.

Political families consolidate control over access to state resources, while bureaucracies serve as vehicles for loyalty rather than performance.

Here, Douglass North’s concept of adaptive efficiency becomes central. In healthy societies, innovation and problem-solving emerge through decentralized experimentation—allowing multiple actors to test ideas and learn over time.

But in a captured social democracy, decision-making becomes centralized, risk-averse, and politically motivated.

Instead of adaptive efficiency, the system evolves toward extractive efficiency—maximizing rent extraction rather than problem-solving. Every “reform” becomes another opportunity for patronage. 

IE. Goodhart’s Law and the Metric Illusion: Governance by the Numbers 

When a measure becomes a target, it ceases to be a good measure. 

Goodhart’s Law explains why governance quality erodes: once developmental indicators—poverty reduction, infrastructure spending, digitalization—become political targets, they cease to measure real progress.

Politicians and bureaucracies chase metrics, not meaning. Budgets swell to create the optics of success, even as institutional capacity stagnates. 

Despite headline growth, nearly half of Filipino families still identify as poor, and hunger rates remain stubbornly high—underscoring the dissonance between GDP triumphalism and lived reality. 

The logic of numbers has replaced the logic of outcomes. For instance, infrastructure becomes a scoreboard; social amelioration, a campaign metric. 

What cannot be measured—quality of life—disappears from governance priorities. 

IF. The Limited Access Orders: Elite Stability Through Controlled Competition 

North, Wallis, and Weingast’s framework of Limited Access Orders capture this equilibrium. In such systems, elites maintain stability by controlling access to political and economic privileges. Violence is contained not through rule of law, but through negotiated rents among dominant coalitions. 

Competition—whether electoral or market—is not eliminated, but managed to prevent instability. 

In the Philippine context, the political economy resembles a cartel: quasi-competition among elites crowds out MSMEs through the BSP’s easy-money regime and the regulatory state. 

Access to capital, permits, and protection is rationed—not by merit, but by proximity to power. 

The ruling oligarchy—masquerading as democratic elites—justifies this concentration through the promise of trickle-down prosperity. Anchored on a record-high savings-investment gap, the benefits rarely diffuse. They consolidate, reinforcing privilege and power. 

Corruption, then, is not a malfunction. It is the stabilizing mechanism of the political order. Public works and welfare programs distribute rents downward to maintain consent, and upward to preserve privilege. 

IG. The Financialization of Patronage 

The BSP’s easy-money regime acts as the lubricant of this system. Cheap credit, monetized deficits, and liquidity injections sustain the illusion of prosperity. Fiscal populism flourishes, financing both vote-buying and elite projects under the banner of “inclusive growth.”

Figure 2

Yet as public debt expands (Php 17.468 trillion in August) and private credit is crowded out (Bank compliance of MSME lending share 4.59%), efficiency dissipates, innovation recedes, and systemic risk mounts. (Figure 2, upper image)

The same elites who dominate politics now dominate finance—transforming competition into collusion. What began as political capture of budgets has evolved into financial capture of capital. Bank’s net claims on central government (NCoCG) reached Php 5.445 trillion or 31% of public debt, last August. (Figure 2, lower graph)

However, elite finance no longer thrives on production, but on asset transfers anchored in debt—rent extraction by other means.

IH. Ochlocratic Democracy and the Squid Game Parable

Social democracy becomes a shell—democratic in ritual, oligarchic in practice. Elections legitimize extraction. The state grows as both employer and benefactor. Bureaucracies serve dynasties. Welfare becomes vote collateral.

Philippine politics drifts toward ochlocracy—where collective dependency replaces civic reason, and politics becomes an auction of favors.

In the popular Korean drama Squid Game, participants vote democratically on whether to continue the deadly contest. It’s a grim parody of ochlocratic democracy—where the masses “choose” within a system they cannot change, while elites watch from above, entertained by their struggle.

Philippine politics mirrors this cruel symmetry: voters play the game of elections, but the rules—and the rewards—belong to the few who own the arena.

This is the tragedy of ochlocratic democracy: people mistake participation for power, and choice for change.

II. The Tragic Paradox of Philippine Social Democracy

The paradox is tragic. Social democracy began as an ideal of empowerment, but its penchant for populist collectivism and institutional capture devolved into systemic dependency. It rewards extraction over experimentation, and loyalty over learning and entrepreneurship.

As North warned, prosperity depends not on good intentions or efficient markets, but on institutions that foster experimentation, decentralization, and accountability. When these vanish, societies lose their adaptive capacity—and settle into the stability of decay. 

That decay now finds fiscal expression. 

The controversial 2025 national budget, packed with pork-laden projects, confidential allocations, and populist welfare programs, does not represent governance—it exposes social democracy’s rent-distribution paradigm.

It is the modern stage of our own Squid Game democracy: grand spending justified by social ideals, yet orchestrated to consolidate power. The next step forward is not reform in name, but reckoning in structure.

Part II: The Political Economy of Corruption

IIA. The Pandora’s Box of Public Spending 

The opening of the public spending Pandora’s Box exposes the government’s MIDAS touch—except that what it touches doesn’t turn into gold but corruption. From overpricing to kickbacks, bribery to ghost projects, and more, allegations of improprieties have emerged not only in flood control programs but also across farm-to-market roads, election platforms, healthcare centers, the DICT’s WiFi subscription services, LTO license plates, and more yet to come. 

The iceberg unravels. 

We recently wrote: 

Authorities hope for three things: 

• That time will dull public anger
• That the probe’s outcome satisfies public appetite
• That new controversies bury the scandal

But history warns us: corruption follows a Whac-a-Mole dynamic—until it hits a tipping point.

Here is what we missed. 

In a striking inversion of democratic logic, the Philippine Navy’s recent warning—that public outrage over flood control failures may expose the nation to foreign propaganda—reveals a deeper institutional reflex: the impulse to reframe civic dissent as geopolitical vulnerability. 

The narrative is shifting: from corruption to propaganda, from domestic failure to foreign destabilization. In this alchemy of blame, scandal becomes sovereignty, and criticism becomes treason. 

The Thirty-Six Stratagems offer an apt lens: “Let the enemy’s own spy sow discord in his own camp.” When power is cornered, it conjures enemies to restore cohesion—sowing the seeds of conflict, via diversion, to preserve its own survival. 

By invoking the specter of foreign interference, the regime deflects attention from systemic rot to imagined threats, weaponizing patriotism against dissent. 

Yet one must ask: is the Philippine military also attempting to obscure internal corruption within its own agency? 

IIB. The Fiscal Mirage: Bigger Budgets, Shrinking Revenues

Figure 3

Despite the domino trail of corruption being exposed, political authorities recently passed the 2026 budget of Php 6.793 trillion—up from this year’s enacted Php 6.326 trillion. Though this marks a 7.4% increase, it rose by Php 467 billion from last year, the fourth highest ever. (Figure 3, topmost chart) 

The House of Representatives even increased its allocation by Php 10 billion. 

However, the Bureau of the Treasury quietly revised the 2025 expenditure target downward—from Php 6.326 trillion to Php 6.082 trillion—likely after realizing it had overestimated non-tax revenue projections. 

All things equal, this translates to an 11.7% increase or ₱711 billion, the largest peso expansion in Philippine fiscal history. 

While actual spending this year may fall below the enacted budget, history suggests it will still exceed the revised target. 

In any case, because corruption is often framed in binary terms—black or white, good or evil—the 2026 budget signals that the establishment expects the scandal to breeze over and the good times to continue. 

This echoes Aldous Huxley’s warning:

That men do not learn very much from the lessons of history is the most important of all the lessons of history. 

IIC. The Economic Undercurrent: A Slowdown Beneath the Noise 

While the September Php 248.1 billion deficit was reported as having narrowed from last year—due to a 7.5% decline in expenditures amid DPWH embroilment— few noted that public revenues also fell by 5.99%. 

Yes, tax revenues grew: BIR up 4.74% YoY, BoC up 5.25%. But non-tax revenues collapsed by 65.8%. 

The quarterly and year-to-date numbers reveal a broader slowdown: (Figure and Table 3, middle and lower windows) 

Q3 2025: -3.22% revenues, +4.47% tax revenues (BIR +4.87%, BoC +3.297%), non-tax -48.24%

Q3 2024: +16.95% revenues, +11.7% tax revenues (BIR +14.7%, BoC +3.61%), non-tax +61.7%

9M 2025: +2.2% revenues, +8.6% tax revenues (BIR +10.9%, BoC +1.6%), non-tax -34.7%

9M 2024: +16.04% revenues, +10.6% tax revenues (BIR +12.73%, BoC +4.6%), non-tax +62.85% 

The bottom line: where revenues are conditioned on economic performance and administrative capacity, the Q3 slowdown signals deeper economic weakening—dragging down the 9M performance. The GDP leads tax collections. 

Yet, the public barely realizes that the economy is tacitly emaciating, while the corruption scandal, which partly curtailed spending, exacerbates the decline.

Figure 4

Despite the September contraction in public spending, 9M YoY growth slipped from 11.6% in 2024 to 5.2% in 2025. Still, public spending hit an all-time high of Php 4.484 trillion. Figure 4, topmost visual) 

As a result, the 9-month deficit swelled to Php 1.117 trillion—just 1.92% or Php 21.85 billion shy of the historic Php 1.139 trillion budget gap during the pandemic recession year of 2021 —an astounding fiscal gap without a recession. (Figure 4, middle diagram) 

A massive pandemic-sized fiscal backstop without a crisis—what is the government not telling the public? 

IID. The Policy Backlash: Easy Money Meets Fiscal Decay 

One might add: all this unfolds amid the BSP’s easing cycle—marked by interest rate and RRR cuts, plus a doubling of deposit insurance. 

All told, the economy now reels from the unintended consequences of overlapping policies:

• Bank-financed asset bubbles,
• Crowding-out of private credit,
• The soft USD-peg, and
• Implicit backstops for bank balance sheets. 

Together, these reinforce malinvestments that distort both fiscal and monetary stability. 

Once again, from our September post (bold original): 

Many large firms are structurally tied to public projects, and the economy’s current momentum leans heavily on credit-fueled activity rather than organic productivity. 

Curtailing infrastructure outlays, even temporarily, risks puncturing GDP optics and exposing the private sector’s underlying weakness. 

Or if infrastructure spending is curtailed or delayed, growth slows and tax revenues fall—VAT, corporate, and income tax collections all weaken when economic activity contracts. 

This means the deficit doesn’t necessarily shrink despite spending restraint; the “fiscal hole” may, in fact, widen—imperiling fiscal stability and setting the stage for a potential fiscal shock. 

The irony is stark: efforts to contain corruption by tightening spending could deepen the very gap they aim to close.

This means that an extended softening of GDP entails a much higher deficit-to-GDP ratio—recently adjusted to 5.5% for 2025.

Crucially, few realize that further slippage in this ratio amplifies the risk of a fiscal shock—a scenario no longer theoretical but increasingly imminent.

IIE. The Mirage of Deficit-to-GDP Ratio: When Optics Replace Substance 

Yet what policymakers increasingly celebrate as "fiscal discipline" may in fact be a statistical mirage. 

The narrowing of the deficit-to-GDP ratio, often paraded as proof of resilience, conceals deeper structural decay beneath the surface. (Figure 4, lowest chart) 

For while nominal figures appear stable, the underlying engine of growth—real production, capital formation, and household income—has been hollowing out. The economy’s apparent balance is not born of strength, but of accounting illusion. 

The obsession with deficit-to-GDP optics reveals how politicians and bureaucrats chase statistical benchmarks—or what I call as ‘benchmark-ism’—over structural integrity. As the ratio falls—even while real GDP softens—authorities infer that deeper deficits carry little cost. 

Numerically, the ratio implies GDP is outperforming the deficit, either through faster nominal growth or slower deficit expansion. But this dissonance masks a dangerous illusion: debt-financed deficits now comprise a substantial and growing share of GDP. 

The economy’s rising dependency on public spending, funded by mounting debt, creates a fragile equilibrium. 

Once the extraction and redistribution mechanism weakens—manifesting as a sharp GDP decline—the ratio could spike violently. 

In all, the falling deficit-to-GDP ratio conceals the economy’s eroding capacity to absorb and repay debt. It’s not a sign of resilience, but a warning of latent fragility. 

IIF. The Mirage of Prudence: Debt, Deception, and the Ochlocratic State 

This leads us to debt. 

Media and authorities entertain us with a dramatic 71.1% plunge in BSP-approved FX borrowings in Q3 2025, projecting an image of fiscal prudence and stability. 

Officials attribute the slowdown to the “frontloading” of offshore financing earlier in the year. 

Yet BSP approved $12.28 billion in the first 9 months of 2025—up 16.1% from $10.58 billion in the same period last year. For context, BSP approved $13.8 billion for the full year 2024. 

What they fail to highlight is that the Q3 deficit—among the largest on record—pushed the 9-month shortfall to 2021 levels. This demands financing. The data suggests BSP either shifted operations through banks, reclassified borrowings via accounting gymnastics, or pivoted to peso-denominated debt.

Figure 5

What BSP’s data shows supports this view. In August, banks’ net foreign assets surged 45% year-on-year, while the BSP’s claims rose by a mere 0.7%. This divergence indicates a clear shift in FX borrowing and asset buildup from the BSP and national government toward the banking sector. (Figure 5, topmost graph) 

In effect, external leverage didn’t disappear—it was privatized, migrating into bank balance sheets where it escapes fiscal scrutiny but magnifies systemic risk. 

However, financing did slow in September, marking a second consecutive decline. This pulled 9-month financing back to 2024 levels, implying a slowdown in national debt growth—even as deficits soared past last year’s. Again, this hints at rescheduling maneuvers or creative fiscal accounting. (Figure 5, middle pane) 

We saw a similar pattern with amortization. Media and consensus proudly cited a debt financing slowdown in 1H 2025. But analyzing the June deficit, we surmised in August that this reflected one or more of the following: Scheduling choices, prepayments in 2024 and political aversion to public backlash 

Amortizations resurfaced by August, and September data reinforced the rebound. 

More strikingly, interest payments surged 15.4% in September, pushing their 9-month share of expenditures to 14.85%—the highest since 2009. (Figure 5, lowest graph)

Figure 6

Combined, amortization and interest payments in the first 9 months of 2025 already exceed 2023’s annual totals and sit just 7.5% below 2024’s all-time high— with a full quarter remaining! (Figure 6, upper chart) 

Meanwhile, foreign-denominated debt servicing fell 35% in September—its fourth straight monthly decline and the largest yet. This pulled its 9-month share of total debt servicing down from 21.04% in 2024 to 19.7% in 2025. (Figure 6, lower image) 

What’s apparent is a deliberate effort to paint macro stability by suppressing FX loan exposure. 

But in doing so, even if a fiscal shock doesn’t erupt in 2025, its shadow has: the pullback in FX loans weakens BSP’s structural defenses for its ‘soft peg’ regime. 

Finally, while we view the deficit-to-GDP ratio as a flawed metric, its relevance to consensus sentiment remains. A shock could send USD/PHP soaring, stocks plummeting, inflation spiking, rates rocketing and the economy stumbling—a chain reaction born of fiscal manipulation disguised as discipline. 

Part III: Conclusion: The Final Drift: From Rent-Seeking to Crisis 

The current flood control scandal reaffirms the lessons of the EDSA I and II Revolutions: corruption is not a binary, black-and-white event underwritten by good or bad ethics, but a symptom of a broader, deeper, and entrenched political-economic pathology called social democracy—where elections are treated as opportunities to gain both political capital and economic power through tenure-based rent-seeking. 

Thus, the systemic drift deepens toward free lunch policies—protecting the interests of a privileged few, while masking them as welfare interventions for the many. These “trickle-down” redistributions, in practice, breed dependence and disincentivize productivity. 

Intervention begets intervention, as every maladjustment and distortion calls forth another. 

As of this writing, the Philippine leadership has ordered a 50% cut in construction material prices while previously imposing both price ceilings on rice (MSRP and the “20-peso rollout”), and recently, price floors on palay farmgate prices.

Each measure deepens the drift toward centralization or socialism. 

The entropic consequences of the ochlocratic–social democratic regime are now manifesting even in embellished government data—suggesting that worsening conditions can no longer be shielded by the gaming and manipulation of marketplace and statistics (GDP, CPI, fiscal deficit, and debt among the most politically sensitive). 

The more the state intervenes to sustain the illusion of stability, the faster its underlying contradictions compound. 

The emergence of deeply seated corruption amid an ongoing economic slowdown exposes not only the late-cycle phase transition—but also Kindleberger’s drift toward the age of swindles, fraud, and defalcation. 

In the end, because both political and economic structures are ideological and self-reinforcing, reform from within is improbable. 

The deepening economic and financial imbalances will not resolve through policy, but will ventilate through a crisis—again the lessons of the post-1983 debt restructuring of EDSA I and the post-Asian Financial Crisis of EDSA II. 

____ 

References 

Based on legal caps under RA 8370 and RA 7166 and independent estimates (PCIJ, Inquirer, SunStar), actual campaign spending in competitive areas far exceeds statutory limits.

Prudent Investor Newsletters, The Philippine Flood Control Scandal: Systemic Failure and Central Bank Complicity, Substack, October 05, 2025 

Prudent Investor Newsletters, When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal, Substack, September 07, 2025 

Prudent Investor Newsletters, June 2025 Deficit: A Countdown to Fiscal Shock, Substack, August 03, 2025

 

PSE Divergence Confirmed — The September Breakout That Redefined Philippine Mining in the Age of Fiat Disorder

 

The choice of the good to be employed as a medium of exchange and as money is never indifferent. It determines the course of the cash-induced changes in purchasing power. The question is only who should make the choice: the people buying and selling on the market, or the government? It was the market that, in a selective process going on for ages, finally assigned to the precious metals gold and silver the character of money. For two hundred years the governments have interfered with the market’s choice of the money medium. Even the most bigoted étatists do not venture to assert that this interference has proved beneficial—Ludwig von Mises 

In this issue 

PSE Divergence Confirmed — The September Breakout That Redefined Philippine Mining in the Age of Fiat Disorder

I. April 2023: The Thesis That Time Has Now Validated

II. September’s Seismic Shift: Mining Index Outpaces the PSEi

III. The Fiat Fracture: Gold's Three-Legged Bull Market and the Chronicle of Monetary Rupture

IV. Gold as Signal of Systemic Stress

V. Fracture Points: Tumultuous Geopolitics and the New War Economy

VI. A Militarized Global Economy and The Fiscal–Military Feedback Loop

VII. Economic Warfare: Tariffs, Fragmentation, and Supply Chain Bifurcation

VIII. World Central Banks Signal Distrust: The Gold Accumulation Surge and Fiat Erosion

IX. The Paradox of Philippine Mining Reform: Bureaucratic Control over Market Forces

X. The Philippine Mining Index Breakout: Gold Leads, Nickel Surprises, Copper Lags and the Speculative Spillover

XI. Conclusion: The Uneasy Return of Hard Assets in a Soft-Money World 

PSE Divergence Confirmed — The September Breakout That Redefined Philippine Mining in the Age of Fiat Disorder 

Beyond the PSEi: Tracking the Philippine Mining Index's decoupling, the gold-fiat fracture, and the systemic risks that power resource equities. 

I. April 2023: The Thesis That Time Has Now Validated

Figure 1 

Back in April 2023, we predicted that rising gold prices would boost the Philippine mining index for several reasons: (see reference) 

1. Unpopular – It is the most unpopular and possibly the "least owned" sector—even "the institutional punters have likely ignored the industry." As proof, it had the "smallest share of the monthly trading volume since 2013." 

2. Lack of Correlation – "its lack of correlation with the PSEi 30 should make it a worthy diversifier" 

3. Potential Divergence – We wrote that "the current climate of overindebtedness and rising rates seen with most mainstream issues, the market may likely have second thoughts about this disfavored sector. Soon." 

4. Formative Bubble – We posed that "If the advent of the era of fragmentation or the age of inflation materializes, could the consensus eventually be chasing a new bubble?" 

Well, media coverage hardly noticed it, but the relative performance of the Mining sector vis-à-vis the PSEi 30—or the Mining/PSEi ratio—made significant headway last September. It critically untethered from its 5-year consolidation phase. (Figure 1, topmost chart) 

Recall: mines suffered a brutal 9-year bear market from 2012 to 2020. The Mining/PSEi ratio hit its secular low during the pandemic recession, pirouetted to the upside, peaked in September 2022, but remained rangebound—nickel lagged, and gold lacked sufficient momentum to lift the index. 

II. September’s Seismic Shift: Mining Index Outpaces the PSEi 

That dramatically changed in September. The Mining/PSEi ratio experienced a seismic breakout, powered by a decisive thrust in gold mines, buoyed further by surging nickel mines. 

But this time may be different. The 2002–2012 bull cycle was driven by Mines outrunning a similarly bristling PSEi 30. Today, the Mines are diverging—operating antithetically from the broader index—a potential reflection of gradual and reticent transition of market leadership. (Figure 1, middle graph) 

The September numbers underscore the shift (Figure 1, lowest table) 

PSEi 30: –3.28% MoM, –18.14% YoY, –6.46% QoQ, –8.81% YTD

Mining Index: +25.86% MoM, +47.97% YoY, +35.07% QoQ, +63.96% YTD 

So yes, it fulfilled our projections of a bull market in motion while validating our ‘diversifier’ thesis. Still, despite its massive run, the sector remains disfavored—its share of the monthly main board volume remains the smallest.

Figure 2

Even with the gaming sector’s bubble showing cracks, speculative interest in PLUS and BLOOM (at 4.38%) nearly matched the ten-issue Mining Index (4.46%) in September. In short, market sentiment still favors gaming over mining. (Figure 2, topmost image) 

Ultimately, the mining sector’s performance—and its transition to a potential secular bull market—will hinge on its underlying commodities. 

In 2016, we wrote, 

Divergence or rotation can only be affirmed when gold mining stocks will move independently from the mainstream stocks. The best evidence will emerge when both will move in opposite directions. This had been the case from 2012 through 2015 when miners collapsed while the bubble industries blossomed. It should be a curiosity to see when both trade places. Time will tell. [italics original] (Prudent Investor, 2016) 

That’s a bullseye!

III. The Fiat Fracture: Gold's Three-Legged Bull Market and the Chronicle of Monetary Rupture 

Gold’s long-term ascent is a chronicle of monetary rupture. (Figure 2, middle chart) 

The first major break came under Franklin D. Roosevelt, with Executive Order 6102 (1933) and the Gold Reserve Act (1934), which outlawed private gold ownership and revalued the dollar’s gold peg from $20.67 to $35 per ounce. This statutory debasement set the modern precedent for political interference in money. 

The second rupture—Nixon’s 1971 “shock” ending Bretton Woods convertibility—ushered in the fiat era. Untethered from monetary discipline, gold surged from $35 to ~$670 by September 1980, a 19x return over nine years, driven by double-digit inflation, oil shocks, and institutional distrust. This marked the first leg of the post-gold-standard bull cycle under the U.S. dollar’s fiat regime. 

The second leg (2001–2012) unfolded over eleven years, beginning around $265 in February 2001 and peaking near $1,738 in January 2012—a 6.6x return. 

This phase reflected a response to cascading financial crises and aggressive monetary easing: the dotcom bust, 9/11, the Global Financial Crisis, and the Eurozone debt spiral. Central bank interventions—QE and ZIRP from the Fed and ECB—amplified gold’s role as a hedge against fiat dilution. 

The third leg (2015–) began in late 2015, bottoming near $1,050 in the aftermath of China’s devaluation. Over the next decade thru today, gold climbed past $3,800—a ~3.6x return—driven by global central bank accumulation, geopolitical fracture, asset bubbles, inflation spillovers, and record leverage across public and private sectors. 

As a sanctuary asset, gold has not only preserved purchasing power but also signaled systemic fragility. Real (inflation-adjusted) prices have reached all-time highs, underscoring gold’s function as a monetary barometer. (Figure 2, lowest diagram) 

Today, its strength reflects more than cyclical momentum—it mirrors the widening cracks of the fiat era. 

Gold’s trajectory—marked by 9-, 11-, and 10-year legs—suggests that mining valuations may be more tightly coupled to global monetary dysfunction than domestic policy alone. 

With gold now approaching USD 4,000, history suggests we may well see prices reach at least USD 6,000.

For resource-driven economies like the Philippines, this episodic repricing offers a potent lens for evaluating mining equities.  Rising gold valuations, persistent inflation, and the flight to real assets amid waning faith in fiat systems suggest that mining performance may be more tightly coupled to global monetary dysfunction than domestic policy alone. 

Still, each leg has emerged from distinct fundamentals—past performance may rhyme, but not reprise. 

IV. Gold as Signal of Systemic Stress 

Last March, we launched a three-part series forecasting that gold would sustain its record-breaking run. 

In the first installment, we argued that gold has historically served as a leading indicator of economic and financial stress: "gold’s record-breaking runs have consistently foreshadowed major recessions, economic crises, and geopolitical upheavals."

Figure 3 

Today, that reflexive relationship remains in play. 

As global growth falters under the weight of fiscal imbalance and geopolitical strain, central banks have turned decisively toward rate cuts, reversing the tightening cycle that began in 2022. By September, the scale of collective policy easing has already approached pandemic-era levels, underscoring a synchronized monetary response to mounting economic stress. (Figure 3, topmost window) 

V. Fracture Points: Tumultuous Geopolitics and the New War Economy 

In the second part, we explored how monetary disorder underpins gold’s sustained upside. "Gold’s record-breaking rise may signal mounting fissures in today’s fiat money system, " we wrote, “fissures expressed through escalating geopolitical and geoeconomic stress. "  

Those fissures have widened. Over the past month, geopolitical tensions have intensified across multiple fronts, amplifying systemic risks for both commodity markets and global capital flows. In Europe, the Ukraine war has evolved from proxy engagement to near-direct confrontation, punctuated by Putin’s claim that "all NATO countries are fighting us." 

Hungarian Prime Minister Viktor Orbán echoed this unease, posting on X: (Figure 3, middle picture) 

"Brussels has chosen a strategy of wearing Russia down through endless war… sacrificing Europe’s economy, and sending hundreds of thousands to die at the front. Hungary rejects this. Europe must negotiate for peace, not pursue endless war." 

Paradoxically, Hungary is part of EU and NATO. 

In the Middle East, Trump’s proposed Gaza peace plan has been welcomed by parts of the EU but criticized by both Israeli hardliners and Hamas, exposing deep political rifts that could derail any lasting truce. 

Washington has also expanded its Caribbean military buildup apparently eyeing Venezuela—a Russian ally—under the pretext of targeting “drug smugglers.” 

Compounding these tensions are the looming U.S. government shutdown, ICE-fueled riots, EU fragmentation, and territorial disputes across Asia (including the Thai-Cambodia and South China Sea flashpoints). Together, these developments erode international interdependence and deepen the sense of global instability. 

VI. A Militarized Global Economy and The Fiscal–Military Feedback Loop 

Adding fuel to the fire, debt-financed fiscal stimulus through military spending has reached unprecedented scale. According to SIPRI, global military expenditures rose 9.4% in real terms to $2.718 trillion in 2024—the highest total ever recorded and the tenth consecutive year of increase. (Figure 3, lowest visual) 

This war economy buildup echoes historical patterns, where militarism became not just a tool of statecraft but a structural imperative. 

Modern defense economies increasingly resemble historical warrior societies such as Bushido Japan, Sparta, and Napoleonic France, where militarism evolved from a tool of power into a systemic necessity. 

In these societies, idle warriors or elite military classes threatened internal stability, compelling leaders to redirect aggression outward. Hideyoshi’s invasion of Korea, for instance, was less about conquest than about pacifying a restless samurai class. 

Today’s massive defense spending serves a parallel function: sustaining industrial output, protecting elite interests, and demanding perpetual geopolitical justification. The result is a fiscal–military feedback loop in which peace itself undermines the architecture of power. 

This militarized economic order breeds a dangerous paradox: when growth depends on arms production and deterrence, the line between defense and aggression dissolves. As nations over-arm to preserve influence and momentum, the world risks sliding into a self-fulfilling conflict dynamic—where fiscal expansion, political ambition, and national pride coalesce into the very forces that once ignited global wars. 

VII. Economic Warfare: Tariffs, Fragmentation, and Supply Chain Bifurcation 

These geopolitical flashpoints are layered atop escalating geoeconomic risks that mirror economic warfare. 

The U.S. has rolled out sweeping new tariffs—10% on lumber and 25% on furniture and cabinetry—adding to earlier steel and aluminum levies that have rattled European industries. With a stronger euro hurting export competitiveness and rising trade barriers disrupting supply chains, Europe’s manufacturing base faces mounting stress. 

The U.S. recently raised tariffs on Philippine exports to 19%, part of a broader “reciprocal” trade posture that threatens ASEAN and EU economies alike. Export controls targeting Chinese tech and semiconductor firms underscore the growing bifurcation of global supply chains, especially in the AI and chip sectors. 

VIII. World Central Banks Signal Distrust: The Gold Accumulation Surge and Fiat Erosion

Figure 4

Amid this widening fragmentation, central banks have accelerated their gold accumulation—buying despite record-high prices. 

As the World Gold Council reported, central banks added a net 15 tonnes of gold in August, consistent with the March–June monthly average, marking a rebound after July’s pause. Seven central banks reported increases of at least one tonne, while only two reduced holdings. (Figure 4, topmost and middle charts) 

Notably, as political institutions, central bank reserve management decisions are not profit but politically driven. 

The Bangko Sentral ng Pilipinas (BSP), additionally, was the world’s largest seller of gold reserves in 2024, citing profit-taking at higher prices. Yet in 2025, it resumed small purchases—ironically, at even higher price levels. (Figure 4, lowest graph)  

Figure 5 

Measured in Philippine pesos, gold and silver prices are extending their streak of record-breaking highs (Figure 5, upper window) 

As history reminds us, the BSP’s massive gold sales in 2020 preceded the 2022 USD/PHP spike, suggesting that the 2024 divestment—intended to support the peso’s soft peg—could again foreshadow a breakout above PHP 59, perhaps by 2026? 

Most strikingly, global central banks’ gold reserves have grown so rapidly that their aggregate gold holdings are now nearly on par with U.S. Treasury holdings—a clear sign of eroding faith in the contemporary U.S. dollar-based order. (Figure 5, lower image) 

The modern-day Thucydides Trap—intensifying hegemonic competition expressed not only in geopolitics, but also in economic, financial, and monetary spheres—has increasingly powered the gold-silver tandem. 

Viewed in this light, as gold rises against all currencies, the message is clear: it is not gold that’s appreciating, but fiat money that’s depreciating. Gold is no longer just insurance asset— it is, and remains, money itself. 

IX. The Paradox of Philippine Mining Reform: Bureaucratic Control over Market Forces 

In the absence of commodity spot and futures markets—a critical handicap to price discovery, risk management, and capital formation—the state’s default response has been to expand taxation and administrative controls instead of developing genuine market mechanisms. 

Rather than pursuing market liberalization or introducing commodity exchanges to improve efficiency and productivity, the Philippine social democratic paradigm of reform remains fixated on taxation, administration, and bureaucratic control. 

The passage of the Enhanced Fiscal Regime for Large-Scale Metallic Mining Act (RA 12253) and the push for the Mining Fiscal Reform Bill mark the government’s latest attempt to "modernize" the fiscal framework of the mining industry. 

On paper, these reforms promise stronger oversight, greater transparency, and a "fairer share" of mineral wealth between the state and the private sector. The new regime introduces margin-based royalties, a windfall profits tax, and project-level accounting rules meant to simplify tax compliance and reduce leakages. Yet, beyond the reformist veneer lies a system still anchored on bureaucratic discretion—where regulators retain broad authority to interpret profitability thresholds, accounting standards, and tax computations. 

In practice, this discretion perpetuates the opacity and arbitrariness that the law sought to correct. Rather than institutionalizing transparency, the framework risks entrenching regulatory capture, enabling bureaucrats to negotiate or manipulate fiscal obligations behind closed doors. 

The very mechanisms intended to enhance oversight—royalty audits, windfall assessments, and transfer pricing reviews—may instead become new venues for rent-seeking and selective enforcement. This tension between statutory ambition and administrative reality leaves the industry vulnerable not only to corruption but also to uneven enforcement across operators and regions—cronyism. 

In the short term, elevated metal prices could conceal these governance flaws, boosting fiscal receipts and lifting mining equities under the illusion of reform-led success. But when the commodity cycle turns, the cracks will widen: weak oversight, inconsistent standards, and arbitrary taxation could resurface as deterrents to investment and valuation stability. 

Thus, what was framed as a fiscal modernization drive may ultimately reinforce the industry’s old paradox—where boom times mask systemic fragility, and reforms collapse when prices fall. 

X. The Philippine Mining Index Breakout: Gold Leads, Nickel Surprises, Copper Lags and the Speculative Spillover 

Lastly, while gold mining shares primarily contributed to the breakout of the Philippine Mining Index, nickel mines also sprang to life and added to the rally. The Philippine Stock Exchange recalibrated the composition of the Mining Index last August to reflect sectoral momentum. 

Gold-copper Lepanto A and B replaced Benguet A and B, while gold-silver miner Oceana Gold was newly included.

Figure 6

This partial reconstitution, combined with price action, reshaped the index’s internal weightings: as of October 3, gold-copper mines accounted for 74.65%, nickel 23.53%, and oil just 1.83%—a notable shift from March 31’s 68.3%-27.44%-4.25% distribution. (Figure 6 topmost graph)

From March 31st to October 3rd, gold mining shares surged 112%, driven by tailwinds from soaring gold and silver prices. Nickel mining shares, surprisingly, jumped 66.4% despite depressed global nickel prices. Meanwhile, solo oil exploration firm PXP Energy sank 16.5%. 

The biggest ranked mines in the index, in descending order, were Apex Mining, OceanaGold, Philex, Nickel Asia, and Atlas Consolidated. (Figure 6, second to the top image) 

USD prices of Silver and Copper surging while Nickel consolidates. (Figure 6 second to the lowest visual) 

While gold’s rally was the primary engine of the index breakout—amplified by the inclusion of more gold-heavy names—the rebound in nickel miners was more ironic. 

With easy money fueling an “everything bubble,” a rising tide appears to be lifting all mining boats. 

Another factor is that local nickel miners have mirrored the moves of international ETFs such as the Sprott Nickel Miners ETF [Nasdaq: NIKL], which advanced largely on global liquidity flows rather than on improvements in the underlying metal market. (Figure 6, lowest diagram) 

In essence, the surge in nickel shares reflects financial rotation and speculative spillover—capital chasing laggards and cyclical exposure amid abundant liquidity—rather than any meaningful recovery in nickel fundamentals. If the bids are to be believed, nickel prices would eventually have to rise and remain elevated; otherwise, the rally risks running ahead of earnings reality. 

Meanwhile, despite a resurgent copper price—also mirrored in ETFs like the Sprott Copper Miners ETF [Nasdaq: COPP]—some local copper mines have made little progress in scaling higher. 

We are yet to see substantial breakouts from the peripheral mines, suggesting that speculative flows have been highly selective, favoring liquidity and index-weighted names over broader participation. 

Ironically, the divergence between copper and nickel prices underscores the fragility of the latter’s mining rally. 

While copper’s surge has been confirmed by both spot prices and mining equities—reflected in the coherent ascent of ETFs like COPP—nickel’s stagnation contrasts sharply with the outsized gains in nickel mining shares and ETFs like NIKL. 

This disconnect suggests mispricing: a speculative equity bid front-running a commodity rebound that hasn’t arrived. Without confirmation from the metal itself, the feedback loop sustaining nickel equities risks collapse, exposing the rally as a liquidity mirage rather than a durable trend. 

XI. Conclusion: The Uneasy Return of Hard Assets in a Soft-Money World 

The Philippine mining sector’s transformation from pariah to rising star is both cyclical and structural. It reflects not only higher commodity prices but also the global search for hard assets in an era of currency debasement, geopolitical fracture, and policy incoherence. 

Gold’s rise tells a story of distrust in fiat money; nickel’s divergence, of speculative excess born of liquidity overflow. 

The mining index’s ascent thus mirrors the world’s economic psychology—a blend of fear and greed, of safe-haven accumulation and ultra-loose money–financed speculative rotation. 

Whether this is a sustainable repricing or a liquidity mirage will depend on whether global monetary and fiscal regimes stabilize—or fracture further. The former seems close to impossible; the latter, increasingly probable. 

Either way, the Philippine mining story has become a proxy for something much larger: the uneasy return of hard assets in a soft-money world. 

Postscript: No trend moves in a straight line. Gold, silver, and Philippine mining shares are now extensively overbought—inviting a countercyclical pause, not an end, to their ascent. 

____

References 

Ludwig von Mises, The Real Meaning of Inflation and Deflation, January 2, 2024, Mises.org 

Prudent Investor Newsletter, Investing Gamechanger: Commodities and the Philippine Mining Index as Major Beneficiaries of the Shifting Geopolitical Winds! Substack, April 27, 2023 

Prudent Investor Newsletter, Phisix 6,650: Resurgent Gold, Will Mining Sector Lead in 2016? Negative Yield Spread Hits 1 Month Bill-10 Year Treasuries!, Blogspot February 15, 2016 

Prudent Investor Newsletter Do Gold’s Historic Highs Predict a Coming Crisis? Substack, March 30, 2025 

Prudent Investor Newsletter, Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? (2nd of 3 Part Series), Substack, March 31, 2025 

Prudent Investor Newsletter, How Surging Gold Prices Could Impact the Philippine Mining Industry (3rd of 3 Series), Substack, April 02, 2025 

Prudent Investor Newsletter, The Long-Term Price Trend and Investment Perspective of Gold, Blogspot, August 02, 2020