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

Do Gold’s Historic Highs Predict a Coming Crisis?

Massive money printing and debt accumulation have gone on for something like 80 years, and the system has held together. Why should it end now? Maybe they can wring one more cycle out of the corrupt Keynesian system. That said, I think we have finally reached the actual crisis point. Although this certainly isn’t the first time the inevitable seemed imminent…—Doug Casey 

This three-part series sheds light on the multifaceted story of gold: 

Part one examines how gold price surges have predicted global crises, from the GFC to today. 

Part two analyzes the role of central banks in driving these record highs. 

Part three assesses how these highs could impact the shares of listed Philippine gold mining companies. 

In this issue

Do Gold’s Historic Highs Predict a Coming Crisis?

I. Gold at All-Time Highs: A Beacon of Crisis or Recession Ahead?

II. Gold, The Philippines and the Pandemic Recession:

III. The Bigger Picture: Gold as a Recession or Crisis Bellwether

IV. Gold Outshines the S&P 500: Gold’s Crisis Predictive Power in Focus

Do Gold’s Historic Highs Predict a Coming Crisis? 

First series on gold: Surging USD Gold Prices: A Predictor of Crises from GFC to Pandemic—What’s Next? 

I. Gold at All-Time Highs: A Beacon of Crisis or Recession Ahead?

Figure 1

Is the recent record-breaking streak of gold prices signaling an impending global recession or crisis? 

The relationship between gold and the US GDP has undergone a profound transformation. 

Ironically, gold’s multi-year climb began during the dotcom recession. It surged ahead of the Great Recession of 2007-2009—or 2008 Financial Crisis—and, while falling during its culmination, gained momentum once again before the climax of the Euro crisis. (Figure 1, upper and lower charts) 

Between May 2001 and September 2011, gold prices soared approximately 6.9 times, from $270 to $1,873. 

Thanks to interventions from central banks like the Federal Reserve (FED) and the European Central Bank (ECB), as well as their global counterparts, volatility subsided, and risk perception diminished, ushering in a “goldilocks” period. During this time, gold prices retraced roughly 43%, falling to $1,060 by December 2015. 

However, China’s unexpected currency devaluation in August 2015 triggered a stock market crash lasting until February 2016, further compounded by Donald Trump’s election, ignited the next leg of gold’s bull market, as investors once again sought refuge in the precious metal. 

Gold reached new heights during the US repo crisis of 2019, continuing its ascent prior to the onset of the global pandemic recession. 

It achieved an interim peak of $2,049 in August 2020, representing a remarkable 93.33% increase from its low in 2015. 

Despite the outbreak of the Russia-Ukraine war in February 2022 and peak inflation in mid-2022, gold prices slid by 20%, hitting a low of $1,628 in September 2022. 

The Bank of England’s bailout of UK pension funds during the Truss budget crisis in October 2022 provided support or put a floor under gold prices, stabilizing the market. 

More recently, geopolitical conflicts—including the Israel-Palestine war and its extension to the Israel-Hezbollah conflict—along with rising tensions in hotspots like the South China Sea, escalating global protectionism, and the increased weaponization of finance, have fueled uncertainty. 

Additionally, the re-election of Donald Trump in 2024 and his administration’s policies, including trade wars, demands for the annexation/acquisition of Greenland, and control over the Panama Canal, have added to global economic and geopolitical instability. 

The resumption of hostilities in the Middle East, particularly Israeli attacks in Gaza and Beirut following a broken ceasefire, has further destabilized the region. 

In the Russia-Ukraine conflict, the UK and France have threatened to send troops to support Kyiv, risking escalation as Trump pushes for a quick resolution with concessions to Russia.

On April 2, 2025, Trump’s administration imposed 25% tariffs on all imported cars and light trucks, effective April 3, with plans for broader “reciprocal tariffs” targeting countries like Canada, Mexico, and the EU, prompting threats of retaliation and fears of a global trade war.

Figure 2

The ongoing trade war, did not emerge in a vacuum; rather, it reflects a broader, underlying trend of deglobalization. The rising number of import curbs—spanning tariffs, antidumping duties, import quotas, and other restrictions—represents the cumulative anti-trade measures undertaken by global authorities. 

According to Global Trade Alert, the number of import curbs in force among major economies, including the U.S., EU, China, Canada, Mexico, and the rest of the G20, has surged from under 1,000 in 2008 to over 4,000 by 2024 (Biden era), with the U.S. and EU leading the increase. (Figure 2) 

This proliferation of trade barriers has not only strained economic ties but also influenced foreign relations, contributing to a slippery slope of deglobalization that has materially heightened geopolitical stress. 

For instance, the U.S.’s aggressive tariff policies have prompted retaliatory measures from trading partners, fracturing alliances and fostering and deepening a climate of mistrust, which in turn exacerbates conflicts in regions like the South China Sea and Ukraine. 

This deglobalization trend, coupled with geopolitical flashpoints, has driven investors to seek safe-haven assets like gold, pushing prices to new all-time highs, as shown in the earlier chart, where NYMEX gold futures prices have spiked since 2023 even as the U.S. nominal GDP share of global GDP remains flat. 

II. Gold, The Philippines and the Pandemic Recession

Back in February 2020, I warned: 

In an interview with Ms. Gillian Tett at Council of Foreign Relations (CFR) on October 2014, former Fed chief Alan Greenspan aptly remarked: 

Remember what we're looking at. Gold is a currency. It is still, by all evidence, a premier currency, where no fiat currency, including the dollar, can match it. And so that the issue is if you are looking at the question of turmoil, you’ll find as we always find in the past, it moves into the gold price. 

The bottom line: Gold's uprising against central banking fiat currencies warn that the world is in the transition of entering the eye of the financial-economic hurricane! (Prudent Investor Newsletter)

It turned out that a global recession had already begun. 

In the Philippines, the first local COVID-19 case was reported in early March 2020, prompting the Duterte administration to impose a Luzon-wide lockdown, officially termed "Enhanced Community Quarantine." 

The Philippine economy subsequently plunged into a recession, with GDP contracting from Q1 2020 to Q1 2021.

Figure 3

Gold in the priced in the Philippine peso also soared ahead of the pandemic crisis. (Figure 3) 

III. The Bigger Picture: Gold as a Recession or Crisis Bellwether 

The charts illustrate a clear pattern: since the "Fed Put" during the dotcom bubble, gold’s record-breaking runs have consistently foreshadowed major recessions, economic crises, and geopolitical upheavals. 

These include the GFC, the Eurozone debt crisis, the U.S. repo crisis, the global pandemic recession, and the recent wave of conflicts and protectionist policies. Gold has also proven responsive to the serial interventions of central banks and governments, which have deployed easy money regimes and fiscal stimulus to mitigate these crises. 

For instance, the chart highlights how gold prices dipped during periods of perceived stability (e.g., post-2011 Euro crisis) but surged ahead of crises, reflecting its role as a leading indicator of economic distress. 

Is gold’s series of epic all-time highs yet another chapter in this unfolding saga of economic and geopolitical turmoil? The historical correlation between gold price surges and impending crises suggests that investors should remain vigilant 

IV. Gold Outshines the S&P 500: Gold’s Crisis Predictive Power in Focus

Figure 4

Finally, the mainstream financial narrative often compares gold’s performance to that of the stock market, framing gold as a speculative asset. In this context, gold has significantly outperformed the U.S. S&P 500 by a substantial margin over the past century, particularly since 2000.

However, this comparison is somewhat of an apples-to-oranges exercise. Gold, as a safe-haven asset, serves a fundamentally different role than equities, which are driven by corporate earnings, economic growth, and investor sentiment.

Gold’s value is tied to its scarcity, historical role as money, and its appeal during times of uncertainty, whereas the S&P 500 reflects the performance of the U.S. economy’s largest companies.

Despite this distinction, the comparison underscores gold’s resilience and appeal in an era marked by economic and geopolitical turbulence.

For a more nuanced perspective, the chart’s lower section presents the S&P 500-to-gold ratio, which measures how many ounces of gold are needed to buy the S&P 500 index. This ratio reveals a striking technical pattern: a massive head-and-shoulders formation, a bearish indicator in technical analysis that often signals a potential reversal. 

If this pattern completes, it could indicate a significant outperformance of gold over the S&P 500 in the coming years, potentially driven by a crisis that erodes confidence in equities while boosting demand for gold. 

Given gold’s historical predictive prowess for crises, as evidenced by its price surges before major economic and geopolitical upheavals, this head-and-shoulders pattern may well be fulfilled. 

____

References 

Prudent Investor Newsletter Oh, Gold!!!! February 23, 2020

January 2025 Surplus Masks Rising Fiscal Fragility: Slowing Revenues, Soaring Debt Burden

Monetary pumping and government spending cannot remove the dependence of demand on the production of goods. On the contrary, loose fiscal and monetary policies impoverish real wealth generators and reduce their ability to produce goods and services, thus weakening effective demand for other goods—Dr. Frank Shostak 

In this issue

January 2025 Surplus Masks Rising Fiscal Fragility: Slowing Revenues, Soaring Debt Burden

I. The Mirage of Fiscal Prudence: A Closer Look at January’s Surplus

II. January’s Surplus: A Closer Look, Changes in VAT Reporting Effective 2023

III. Diminishing Returns? Slowing Revenue Growth Amid Record Bank Credit Expansion

IV. The VAT Effect, Public Spending Trends and Breaching the Budget: A Shift in Political Power

V. Fiscal Challenges Deepen as Interest Payments Soar and Crowds Out Public Allocation

VI. January’s Record Cash Spike

VII. Rising Public Debt, Increasing FX Financing and Mounting Pressure on the Philippine Peso

VIII. Banks and the BSP as Fiscal Lifelines

IX. Symptoms of Crowding Out: Weak Demand and Slowing GDP

X. Conclusion: Mounting Fragility Beneath Sanguine Statistical Benchmarks 

January Surplus Masks Rising Fiscal Fragility: Slowing Revenues, Soaring Debt Burden 

VAT reporting changes drove January 2025’s surplus, despite slowing revenue growth, record-high interest payments, and ballooning public debt—exposing growing fiscal vulnerabilities.

I. The Mirage of Fiscal Prudence: A Closer Look at January’s Surplus 

Businessworld, March 21, 2025: "FINANCE Secretary Ralph G. Recto said the budget surplus recorded in January is unlikely to continue in the following months. Asked if the surplus will be sustained in the runup to the elections, Mr. Recto told BusinessWorld: “No. Our deficit target this year is 5.3% of the GDP (gross domestic product).”" 

It’s remarkable how media portrays government fiscal management as though it’s a model of efficiency and foresight. 

This supposedly impartial business outlet echoes the optimism with little scrutiny, displaying a certain undue enthusiasm in their narrative. 

-The “manageable” budget? Public outlays continue to grow, often exceeding the allocations set by Congress. 

-Revenues? These are presented as if they align seamlessly with the government’s projections—reality, it seems, is expected to comply. 

-Changes to VAT reporting? The January surplus was largely a result of this adjustment that took effect in 2023. As a media outlet, they should have recognized this. Instead, the omission conveniently aligns with their theme of unquestioning deference. 

-And the political context of deficit spending? It’s treated as a non-issue, as though public resources are always managed with the utmost prudence and altruism. Yet, this framing sidesteps how deficit spending often fuels projects with short-term appeal but long-term consequences. 

Underlying all this is the assumption that the government is all-knowing, omnipotent, and in perfect command of the economy—a notion more fictional than factual. 

II. January’s Surplus: A Closer Look, Changes in VAT Reporting Effective 2023 

Let us dive into the details. 

Back in September, we noted: "So, there you have it: The rescheduling of VAT declarations from monthly to quarterly has magnified revenues and "narrowed" deficits at the "close" of each taxable quarter."  (Prudent Investor, 2024) 

The changes in VAT reporting took effect on January 1, 2023. 

Though expenditures grew by 19.45%, outpacing revenues’ 10.75% increase, in peso terms, January 2025 revenues exceeded outlays, leading to the month’s surplus.         

Revenues of Php 467.15 billion marked the third-largest monthly total in pesos, following April and October 2024.

Figure 1 

Meanwhile, expenditures were the smallest monthly amount since February 2024. Nevertheless, the long-term spending and revenue trends remain intact so far. (Figure 1, upper window) 

III. Diminishing Returns? Slowing Revenue Growth Amid Record Bank Credit Expansion 

However, despite the revenue outperformance—driven by tax collections—growth rates materially declined in January 2025. Total tax and Bureau of Internal Revenue (BIR) collection growth slowed from 25.03% and 31.35% in 2024 to 13.6% and 15.13% in 2025, respectively.  (Figure 1, lower graph) 

On the other hand, Bureau of Customs (BoC) collections jumped from 3.98% to 7.98% in 2025. Since BIR accounted for 81.2% of the total, tax revenues largely reflected its growth rate.

Figure 2

And this slowdown in revenue growth is occurring alongside record-breaking bank credit expansion! Universal commercial banks reported a 13.3% surge in bank lending growth—the highest rate since December 2020—reaching Php 12.7 trillion in January, slightly below December 2024's record. (Figure 2, upper image)

In a nutshell, the decelerating revenue growth reflects the diminishing returns of the Marcos-nomics fiscal stimulus.

IV. The VAT Effect, Public Spending Trends and Breaching the Budget: A Shift in Political Power

The quarterly shift in VAT reporting resulted in a Php 68.4 billion surplus, the third largest after January 2024 and April 2019. (Figure 2, lower chart)

Although public spending may have appeared subdued in January, the government has an enacted 2025 budget of Php 6.326 trillion, averaging Php 527.2 billion monthly.

Figure 3

Yet, the Executive branch has hardly been frugal—it has consistently outspent legislated allocations since 2016! (Figure 3, upper visual)

If spending, which they have the power to control, cannot be managed, then revenues—being dependent on spontaneous economic and financial interactions—are even less controllable. 

This persistent spending overreach signals an implicit yet pivotal shift in the distribution of political power. As we noted earlier: "More importantly, this repeated breach of the "enacted budget" signals a growing shift of fiscal power from Congress to the executive branch." (Prudent Investor, March 2025) 

This suggests that the monthly average of Php 527 billion represents a floor! We are likely to see months with Php 600-700 billion spending. 

V. Fiscal Challenges Deepen as Interest Payments Soar and Crowds Out Public Allocation 

January 2025 interest payments (IP) soared to a record Php 104.4 billion, pushing their share of total expenditures to 26.2%—a peak last seen in 2009! (Figure 3, lower diagram) 

Authorities attributed this to a "shift in coupon payment timing due to the issuance strategy of multiple re-offerings of treasury bonds," as well as "an earlier servicing of a Global Bond with a February 1 coupon date falling on a weekend." 

Nonetheless, the programmed budget for interest payments in 2025 is Php 848 billion. January’s interest payment equates to 12% of this total 2025 allocation for interest payments, while 26.2% represents its share of January’s total expenditures. 

Interest payments and overall debt servicing data in the coming months will shed light on the true conditions. 

Once again, as we noted earlier: "Government spending will increasingly be diverted toward debt payments or rising debt service costs constrain fiscal flexibility, leaving fewer resources for essential public investments" (Prudent Investor, March 2025) 

VI. January’s Record Cash Spike 

Figure 4

Another striking figure in the government’s cash operations report was the January cash balance surplus, which soared to an all-time high of Php 1.23 trillion, despite reported financing of only Php 211 billion. (Figure 4, topmost pane) 

The Bureau of Treasury (BoTr) reported cash flow deficits of Php 104 billion, Php 261 billion, and Php 370.04 billion in the last three months of 2024, totaling Php 735 billion. The BoTr offered no explanation for this discrepancy. One plausible reason could be the USD 3.3 billion ROP Global bond issuance. 

VII. Rising Public Debt, Increasing FX Financing and Mounting Pressure on the Philippine Peso 

During the same period, public debt rose by Php 261.5 billion month-on-month (MoM) or Php 1.134 trillion year-on-year (YoY) to a record Php 16.313 trillion in January.  (Figure 4, middle graph) 

Authorities are programmed to borrow Php 2.545 trillion in 2025, slightly down from Php 2.57 trillion in 2024. 

Yet, outpacing domestic debt growth of 10.3%, external borrowings rose 13% in January, with their share of the total reaching 32.05%—nearly matching November’s 32.13% and reverting to 2020 levels. (Figure 4, lower image) 

Since 2020, reliance on foreign exchange (FX) borrowings has steadily increased. 

Greater dependence on FX financing raises internal pressure for the Philippine peso to devalue. As we have previously explained, the widening credit-financed savings-investment gap (SIG)—a key element of the structural economic model pursued by authorities—has resulted in persistent 'twin deficits,' which has been magnified by the pandemic era. 

Consequently, it is unsurprising that the upper limit of the USD-PHP ‘soft peg’ continues to be tested by mounting liabilities. The government is increasingly resorting to Hyman Minsky’s "Ponzi Finance"—as organic fund flows decline, reliance on debt refinancing to manage the balance sheet deepens. 

VIII. Banks and the BSP as Fiscal Lifelines

Figure 5

Banks remain a primary source of government financing, with Net Claims on Central Government (NCoCG) up 7.42% YoY to Php 5.409 trillion, though slightly down from December’s all-time high of Php 5.541 trillion. (Figure 5, upper window) 

The Bangko Sentral ng Pilipinas (BSP) is another source. January’s spending decline mirrored the BSP’s NCoCG, which rose 14.54% YoY to Php 390.3 billion but fell 34% MoM from December’s Php 590 billion. The fluctuations in BSP’s NCoCG have closely tracked public spending, with correlations tightening since its historic rescue of the banking system. (Figure 5, lower graph) 

IX. Symptoms of Crowding Out: Weak Demand and Slowing GDP 

Figure 6

Weak demand, potentially exacerbated by lower public spending in January, contributed to the decline in Core CPI, with non-food and energy inflation falling from 2.6% in January to 2.4% in February 2025. (Figure 6, upper diagram) 

It is worth reiterating that record public spending in Q4 2024 accompanied just 5.2% GDP growth—evidence of the crowding-out syndrome in action. (Figure 6, lower chart) 

X. Conclusion: Mounting Fragility Beneath Sanguine Statistical Benchmarks 

The January 2025 surplus is a fleeting anomaly rather than a sign of sustainable fiscal health. The underlying trends—slowing revenue growth, surging debt servicing costs, and increasing reliance on external borrowings—paint a concerning picture of fiscal vulnerabilities, with long-term consequences for economic stability and growth. 

Given that politics often relies on path-dependent economic policies, meaningful reforms are unlikely to occur until they are forced upon the government by market pressures. 

The BSP’s easing cycle, characterized by cuts in interest rates and the Reserve Requirement Ratio (RRR), further underscores this dynamic. These measures effectively accommodate the government’s borrowing-and-spending cycle, exacerbating fiscal imbalances and delaying necessary structural reforms. 

Or, the establishment may continue to tout the supposed capabilities of the government, but ultimately, the law of diminishing returns will expose the inherent fragility of the political economy. This will likely culminate in a blowout of the twin deficits, a surge in public debt, a sharp devaluation of the Philippine peso, and a spike in inflation, reinforcing the third wave of this cycle—heightening risks of a financial crisis. 

____

References 

Prudent Investor Newsletters, Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing, September 1, 2024 

Prudent Investor Newsletters, 2024’s Savings-Investment Gap Reaches Second-Widest Level as Fiscal Deficit Shrinks on Non-Tax Windfalls, March 9, 2025

  

Philippine Treasury Markets vs. the Government’s February 2.1% Inflation Narrative: Who’s Right?

 

Inflation is a tax. Money for the government. A tax that people don’t see as a tax. That’s the best kind, for politicians—Lionel Shriver 

In this issue

Philippine Treasury Markets vs. the Government’s February 2.1% Inflation Narrative: Who’s Right?

I. February Inflation: A "Positive Surprise" or Statistical Mirage?

II. Demand Paradox: Near Full-Employment and Record Credit Highs in the face of Falling CPI and GDP?

III. The Financial Black Hole: Where Is Bank Credit Expansion Flowing?

IV. The USDPHP Cap: A Hidden CPI Subsidy

V. Markets versus Government Statistics: Philippine Treasury Markets Diverge from the CPI Data 

Philippine Treasury Markets vs. the Government’s February 2.1% Inflation Narrative: Who’s Right? 

With price controls driving February CPI down to 2.1%, the BSP’s easing narrative gains traction—yet treasury markets remain deeply skeptical

I. February Inflation: A "Positive Surprise" or Statistical Mirage?

ABS-CBN News, March 5: Inflation eased to 2.1 percent in February because of slower price increases in food and non-alcoholic beverages, among others, the Philippine Statistics Authority said Wednesday. In a press briefing, the PSA said food inflation slowed to 2.6 percent in February from 3.8 percent in January. The state statistics bureau noted that rice inflation further slowed to -4.9 percent from -2.3 percent in January…But the PSA noted that pork prices jumped by 12.1 percent in February, while the price of chicken meat leapt by 10.8 percent.  The cost of passenger transport by sea also soared to 56.2 percent in February.  Del Prado said the African swine fever problem continue to hurt pork prices in the Philippines. She said, however, that the Department of Agriculture’s plan to impose a maximum suggested retail price on pork may help ease price hikes. 

The Philippine government recently announced that inflation unexpectedly dropped to 2.1% in February 2025. One official media outlet hailed it a "positive surprise" in its headline. 

But is this optimism warranted? 

While the Philippine Stock Exchange (PSE)—via the "national team"—welcomed this news, interpreting it as a sign that the Bangko Sentral ng Pilipinas (BSP) could continue its loose monetary policy—essentially providing a pretext for rate cuts—the more critical Philippine treasury markets, which serve as indicators of interest rate trends, appeared to hold a starkly different view. 

As an aside, the BSP’s reserve requirement ratio (RRR) cut takes effect this March 28th, adding fuel to the easing narrative. 

The odd thing is that a critical detail has been conspicuously absent from most media coverage: on February 3, 2025, authorities implemented the "Food Emergency Security" (FES) measure. 

This policy, centered on price controls—specifically Maximum Suggested Retail Prices (MSRP)—was supported by the release of government reserves. 

Consequently, February’s Consumer Price Index (CPI) reflects political intervention rather than organic market dynamics.

Figure 1

Even more telling is an overlooked trend: the year-on-year (YoY) change in the national average weighted price of rice had been declining since its peak in April 2024—well before the FES was enacted. (Figure 1, topmost graph) 

In a nutshell, the FES merely reinforced the ongoing downtrend in rice prices, serving more as an election-year tactic to demonstrate government action "we are doing something about rice prices," rather than an actual cause of the decline. 

Nevertheless, it won’t be long before officials pat themselves on the back and proclaim the policy a triumph. Incredible. 

But what about its future implications? 

Unlike rice, where government reserves were available to support price controls, the impending implementation of MSRP for pork products next week lacks similar supply-side support. This suggests that any price stabilization achieved will be short-lived. (Figure 1, middle chart) 

As noted in February,  

However, as history shows, the insidious effects of distortive policies surface over time. Intervention begets more intervention, as authorities scramble to manage the unintended consequences of their previous actions. Consequently, food CPI remains under pressure. (Prudent Investor, 2025)  

Nevertheless, manipulating statistics serves a political function—justifying policies through "benchmark-ism."  

Beyond food prices, which dragged down the headline CPI, core CPI also eased from 2.6% in January to 2.4% in February. 

Despite this pullback, the underlying inflation cycle appears intact. (Figure 1, lowest image) 

Government narratives consistently frame inflation as a ‘supply-side’ issue or blame it on "greedflation," yet much of their approach remains focused on demand-side management through BSP’s inflation-targeting policies. 

II. Demand Paradox: Near Full-Employment and Record Credit Highs in the face of Falling CPI and GDP? 

Authorities claim that employment rates have recently declined but remain near all-time highs. 

But how true is this?

Figure 2

The employment rate slipped from an all-time high of 96.9% in December 2024 to 95.7% in January 2025—a level previously hit in December 2023 and June 2024. (Figure 2, topmost image) 

Remarkably, despite near-full employment, the CPI continues to slide. 

Officials might argue this reflects productivity gains.  But that claim is misleading.

Consumer credit growth—driven by credit cards and supported by salary loans—has been on a record-breaking tear, rising 24.4% YoY in January 2025, marking its 28th consecutive month above 20%. (Figure 2, middle window) 

Yet, unlike the 2021-2022 period, headline CPI has weakened. 

Could this signal diminishing returns—mainly from refinancing? 

Beyond CPI, total Universal-Commercial (UC) bank loans have surged since Q1 2021—unfazed by official interest rate levels. (Figure 2, lowest diagram)

Figure 3

The slowing growth in salary loans seems to mirror the CPI’s decline. (Figure 3, upper pane) 

And it’s not just inflation. 

Despite an ongoing surge in Universal-Commercial (UC) bank loans since Q1 2021—regardless of official interest rate levels—weak consumption continues to weigh on GDP growth. The second half of 2024 saw GDP growth slow to just 5.2%. (Figure 3, lower chart) 

This boom coincides with record real estate vacancies, near unprecedented hunger rates, and almost milestone highs in self-reported poverty. 

So, where has demand gone? 

In January 2025, UC bank loans (both production and consumer) increased by 13.27% year-on-year. 

Are the government’s employment figures an accurate reflection of labor market conditions? Or, like CPI data, are they another exercise in "benchmark-ism" designed to persuade voters and depositors that the political economy remains stable? 

III. The Financial Black Hole: Where Is Bank Credit Expansion Flowing?

Figure 4 

Ironically, bank financing of the government, as reflected in Net Claims on the Central Government (NCoCG), continues to soar—up 7.4% year-on-year to PHP 5.41 trillion in January 2025, though slightly down from December 2024’s historic PHP 5.54 trillion. 

Meanwhile, since bottoming at 1.5% in April 2023, BSP currency issuance has trended upward, accelerating from May 2024 to January 2025, when it hit 11% YoY. (Figure 4, topmost graph) 

Despite this massive liquidity injection—via bank lending and government borrowing—deflationary forces persist in the CPI. 

Where is this money flowing? What "financial black hole" is absorbing the injected liquidity? 

IV. The USDPHP Cap: A Hidden CPI Subsidy 

The recent weakness of the US dollar—primarily due to a strong euro rally following U.S. President Trump’s pressure on Europe to increase NATO contributions—has driven up the region’s stock markets, particularly defense sector stocks. This, in turn, has triggered a global bond selloff.

The euro’s strength has also bolstered ASEAN currencies, including the Philippine peso. 

As predicted, the BSP’s cap on the USD-PHP exchange rate— a de facto subsidy—has fueled an increase in imports. In January, the nation’s trade deficit widened by 17% to USD 5.1 billion due to a 10.8% jump in imports. (Figure 4, middle window) 

Further, to defend this cap, the BSP sold significant foreign exchange (FX) in January, only to replenish its Gross International Reserves (GIR) in February via a USD 3.3 billion bond issuance. The BSP attributes the GIR increase to "(1) national government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds, (2) upward valuation adjustments in the BSP’s gold holdings due to the increase in the price of gold in the international market, and (3) net income from the BSP’s investments abroad." (Figure 5, lowest visual) 

This disclosure confirms the valuable role of gold in the BSP’s reserves. 

In short, the USD-PHP cap has not only subsidized imports but has also artificially suppressed the official CPI figures. 

From 2015 to 2022, the ebbs and flows in the USD-PHP exchange rate were strongly correlated with CPI trends.  

Figure 5

However, since 2022, when the exchange rate cap was strictly enforced, this relationship has broken down, increasing pressure on the credit-financed trade deficit and necessitating further borrowing to sustain both the cap and the Gross International Reserves (GIR). (Figure 5, topmost image) 

V. Markets versus Government Statistics: Philippine Treasury Markets Diverge from the CPI Data 

First, while global bond yields have risen amid the European selloff, this has not been the case for most ASEAN markets—except for the Philippines. This suggests that domestic factors have been the primary driver of movements in the ASEAN treasury markets, including the Philippines. (Figure 5, middle and lowest graphs)

Figure 6

Second, it is important to note that institutional traders dominate the Philippine treasury markets. This dynamic creates a distinction between the public statements of their respective "experts" and the actual trading behavior of market participants—"demonstrated preferences." 

The apparent divergence between the CPI and Philippine 10-year bond yields—despite their previous seven-year correlation—reveals disruptions caused by other influencing factors. (Figure 6, upper chart) 

Or, while analysts often serve as institutional cheerleaders for the traditional market response to an easing cycle, traders seem to be reacting differently.

Finally, further cementing this case for decoupling, the Philippine yield curve steepened (bearish steeper) during the week of the CPI announcement—suggesting that treasury markets are pricing in future inflation risks or tighter policy, potentially discounting the recent CPI decline as temporary. (Figure 6, lowest graph) 

All in all, while the government and the BSP claim to have successfully contained inflation, treasury markets remain highly skeptical—whether about the integrity of the data, the sustainability of current policies, or both. 

Our bet is on the latter.

___

References  

Prudent Investor, January 2025 2.9% CPI: Food Security Emergency andthe Vicious Cycle of Interventionism February 10, 2025