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

  

Philippines’ Debt Amortization Skyrockets to a Record in March! Surging Fiscal Deficit Weakens the PSE and the Philippine Peso

 

The government deficit is not creating savings for the private economy. Savings in the real economy accept public debt as an asset when they perceive the currency issuer’s solvency to be reliable. When the government imposes it and disregards the functioning of the productive economy, positioning itself as the source of wealth, it undermines the very foundation it purports to protect: the standard of living for the average citizen—Daniel Lacalle

 

In this issue

Philippines’ Debt Amortization Skyrockets to a Record in March! Surging Fiscal Deficit Weakens the PSE and the Philippine Peso

I. Philippines’ Debt Amortization Skyrockets in March Reaching 81% of 2023 Record Levels

II. Driven by Amortizations, Debt Servicing Costs Skyrocketed in Q1 2024: Debt and Debt Servicing in the Shadow of the Asian Financial Crisis

III. Understanding Debt Amortizations

IV. Despite Lackluster Public Spending, March and Q1 2024 Fiscal Deficit Widens

V. Government Spending: The Primary Source of Inflation

VI. Surging Fiscal Deficit Weakens the PSE, the Philippine Peso and Bond Market

 

Philippines’ Debt Amortization Skyrockets to a Record in March! Surging Fiscal Deficit Weakens the PSE and the Philippine Peso

The Philippine government’s public amortization rocketed by an unprecedented rate last March as Q1 2024 fiscal deficits swelled anew. We elaborate on their implications.

I. Philippines’ Debt Amortization Skyrockets in March Reaching 81% of 2023 Record Levels

 

When faced with challenging or adverse developments, does the establishment adhere to a code of silence?

Figure 1

 

Last week, the Philippines' Bureau of Treasury (BoTr) released its cash operations conditions for March, including its debt servicing report. (Figure 1, upper table)

 

The most striking revelation was the remarkable spike in debt amortizations last March, which surged by 469.17% YoY to reach a record Php 462.6 billion!

 

This amount marked the highest monthly figure in the BoTr's records, following the fourth-highest in February 2024.

 

Its surge propelled total debt servicing (interest payments + amortizations) to an all-time high of Php 986.04 billion!   (Figure 1, lower pane)

 

Great huh?

Figure 2

Compared to historical first quarters, Q1 2024's amortization soared by 74.3%, from Php 423.74 billion to a historic Php 793.04 billion!  (Figure 2, topmost window)

 

Importantly, amortizations reached 81.3% of 2023's aggregate of Php 975.3 billion!  

 

That’s EIGHTY-ONE PERCENT with 9 months or three quarters to go!

 

Moreover, Q1 2024's amortization data surpassed all other ANNUAL totals, except for 2023. (Figure 2, second to the highest image)

 

Truly incredible.

 

In Q1 2024, compared to previous annualized performance, amortizations have constituted a milestone 81.4% share of debt servicing, with interest payments making up the remainder at 19.6%. (Figure 2, second to the lowest graph)

 

The opacity of amortizations ensconces this radical shift in the pattern of debt servicing.

 

To diminish reliance on external debt, the government has augmented the share of domestic sources for its amortization schedules. In Q1, domestic financing accounted for a record 85.04% share, with external debt comprising 14.96%. (Figure 2, lowest chart)

 

II. Driven by Amortizations, Debt Servicing Costs Skyrocketed in Q1 2024: Debt and Debt Servicing in the Shadow of the Asian Financial Crisis

Figure 3

 

Once more, driven by amortizations, total debt servicing in Q1 2024 reached 61.5% of last year's Php 1.604 trillion! (Figure 3, topmost visual)

 

That’s right, Q1 2024 debt servicing signifies just 39% below last year's total!

 

Nonetheless, debt servicing relative to revenues hit an all-time high of 185.3% in March, surpassing February 2023's record of 177.33%.

 

Meanwhile, debt-to-expenditures reached 110.3%, the second-highest since February 2023's 118.1%. (Figure 3, middle graph)

 

From previous accounts, the government’s front-loading of the amortizations for the year in Q1 could be a pattern.

 

While the public may remain nonchalant, largely due to the lack of coverage by the government, media, and institutional mouthpieces, soaring debt and debt servicing will eventually take their toll on the economy.

 

The Philippines' public debt-to-GDP ratio has risen way above the levels seen during the Asian Financial Crisis, reaching more than TWICE the 1997 levels and just slightly below the record of 62.6% reached in 2021. (Figure 3, diagram)

 

Meanwhile, the cost of debt servicing relative to GDP has surged to levels last seen in 2011. Despite our repeated warnings about the critical flaws of the debt-to-GDP metric, the increasing reliance on deficit spending amplifies the likelihood of its acceleration. (Prudent Investor, 2021)

 

However, this 'path-dependent' policy decision to reinforce the unsustainable increase in debt-financed deficit spending through the expansion of domestic borrowing seems to be grounded in the belief that the risks of a domestic debt crisis could be minimized. However, this belief is unfounded.

 

As noted in the abstract of a 2008 working paper by Ms. Reinhart and Mr. Rogoff,

 

Our findings on debt sustainability, sovereign defaults, the temptation to inflate, and the hierarchy of creditors only scratch the surface of what the domestic public debt data can reveal. First, domestic debt is big -- for the 64 countries for which we have long time series, domestic debt accounts for almost two-thirds of total public debt. For most of the sample, this debt carries a market interest rate (except for the financial repression era between WWII and financial liberalization). Second, the data go a long ways toward explaining the puzzle of why countries so often default on their external debts at seemingly low debt thresholds. Third, domestic debt has largely been ignored in the vast empirical work on inflation. In fact, domestic debt (a significant portion of which is long term and non-indexed) is often much larger than the monetary base in the run-up to high inflation episodes. Last, the widely-held view that domestic residents are strictly junior to external creditors does not find broad support (Reinhart, and Rogoff 2008) [bold added]

 

The era of free-money politics may be about to face a rude awakening.

 

III. Understanding Debt Amortizations

 

How does the government define debt servicing and amortizations? (bold and italics added)

 

From the Bureau of Treasury:

 

Bond Sinking Fund - A fund established for the purpose of eventually retiring a long-term obligation with a lumpy maturity. At maturity, the cumulative payments/contributions to the sinking fund and the interest earnings should match the principal amount of the debt to be paid.

 

Debt service payments - The sum of loan repayments, interest payments, commitment fees and other charges on foreign and domestic borrowings.

 

Interest payment - Charges imposed as a consequence of the use of money. It is deemed synonymous with discount or coupon payment when applied to government securities.

 

Principal repayment - The sum of the first component of debt amortization, i.e., principal repayments for loans payable in regular installments and actual releases for the eventual payment of debt. These are the cash outlays from the Bureau of the Treasury in payment of principal amounts of foreign and domestic borrowings. (BuTr, 2018)

 

From the Department of Budget and Management:

 

13. What are net borrowings?

 

Net borrowings refer to gross borrowing less debt amortization.

 

14. What liabilities are included under public debt?

 

Public debt includes obligations incurred by the government and all its branches, agencies and instrumentalities, including those of government monetary institutions. It consists of all claims against the government which may be payable in goods and services, but usually in cash, to foreign governments or individuals or to persons natural or juridical. Obligations maybe:

 

1) purely financial, i.e., loans or advances extended to the Philippine government, its branches, agencies and instrumentalities;

 

2) services rendered or goods delivered to the government for which certificates, notes or other evidence of indebtedness have been issued to the creditor; and

 

3) for external debt such as claims of foreign entities, securities held in trust, nonbonded debts and obligations of the Philippine government to the International Monetary Fund (IMF).

 

15. What is debt service?

 

Debt service refers to the sum of debt amortization and interest payments on foreign and domestic borrowings of the national government or the public sector. Under the current system of budgeting, only interest payments are treated as part of the expenditure program because it represents a real expense item, i.e. the cost of borrowed funds, which should form part and parcel of cost of the items financed by the loan Debt principal is treated as an off-budget item because it is merely a return of borrowed funds; hence it is reflected as a financial account. (DBM, 2012)

 

From the Office of the Ombudsman:

 

23. What is meant by debt amortization?

 

Debt Amortization refers to the sum of principal repayments for loans payable by regular installments. It also refers to the annual contribution to the debt sinking fund for debts payable only upon maturity.

 

30. What is debt service?

 

Debt Service consists of the repayment of interest and related costs. The payment of principal amortization is no longer included in the budget, but it is included in the cash outflow. The reason for this is that principal payment is a financing transaction rather than an expenditure. (Ombudsman, 2012)

 

Therefore, amortizations represent, first, the principal repayments of government debt, and second, repayments on the bond sinking fund or other long-term obligations.

 

As financial transactions, amortizations are excluded from the expenditures. Due to this exclusion, discussions within the establishment regarding this matter have been muted.

 

Although the amortization factor is likely to slow in the coming months due to its front-loading in Q1, the pace of debt servicing growth will likely surprise a complacent public, especially with the probable entrenchment of "higher for longer" rates.

 

Be that as it may, the government's increasing reliance on deficit spending to centralize the economy translates to a higher debt load and magnified debt servicing.

 

This, in turn, is likely to result in a slower economy due to imbalances arising from rising taxes, higher inflation (essentially a tax), and heightened misallocation of resources and finances.

 

Again, as noted above, a sustained rise in debt increases the risks of a financial and/or economic crisis.

 

Stagflation, ahoy!

 

IV. Despite Lackluster Public Spending, March and Q1 2024 Fiscal Deficit Widens

ABS-CBN News, April 24, 2024: The Bureau of Treasury said the Philippines’ budget deficit for March narrowed to P195.9 billion from last year’s P210.3 billion on the back of 11.32 percent year-over-year revenue growth vis-à-vis a 3.18 increase increase in government spending. However, the budget gap in the first quarter stood at P272.6 billion marking a slight increase of 0.65 percent or P1.8 billion from the P270.9 billion fiscal deficit recorded for the same period a year ago. Treasury said revenues in the first quarter hit P933.7 billion, or 14.05 percent higher than in the first three months of 2023. Government spending meanwhile reached P1.2 trillion in the Jan-March period this year.

 

Figure 4

 

The base effects played a crucial role in delivering revenue and expenditure performance in March. 

 

Nonetheless, because public spending outsprinted revenues, a wider budget deficit ensued. (Figure 4, topmost image) 

 

The effect of deficit spending on prices remains conspicuous.

 

The crowding-out effect of public spending has fostered demand-supply imbalances, expressed through rising prices. (Figure 4, second to the top left chart)

 

Rising aggregate demand, fueled by money supply growth from credit activities of banks and government, has also boosted revenues.  (Figure 4, second to the top right graph)

 

The slowing CPI (from 2Q 2023) has been correlated with subdued revenues and spending measured in pesos.

 

However, thanks to the government's deficit spending-boosted inflation, Q1 revenues and expenditures hit respective milestone highs in pesos. (Figure 4, lowest diagrams)

Figure 5

 

Interestingly, the Q1 2024 deficit slightly surpassed last year's budget gap—contrary to government projections of this year's deficit improvement. (Figure 5, topmost window)

 

While the establishment may rationalize this solely as a first-quarter effect, our humble guess is that this year's deficit will surprise a disinterested and credulous public.

 

Since the pandemic recession, the government's addiction to free money and expanded power has only become more deeply rooted—where "fiscal stabilizer" has morphed into " fiscal dominance." 

 

Asked differently, where's the recession to justify all of this?

 

Allocations to LGUs slowed in March; they fell by 3.9% year over year. However, this trend may reverse in the coming months due to the forthcoming elections. (Figure 5, second to the highest graph)

 

Furthermore, the 3.54% spending boost in March originated from the national government's disbursement. Finance authorities seem to have shifted spending allocations from LGUs to political projects led by the central government and the bureaucracy.

 

Despite rising by only 16.5% year over year last March, interest payments have clearly been strengthening their upside momentum. (Figure 5, second to the lowest chart)

 

The government’s liquidity conditions have also declined.

 

Based on Q1 conditions, as the budget gap widened in 2024, cash reserves fell from a record Php 909 billion in 2023 to Php 763.4 billion in 2024, a decrease of Php 145.6 billion. We can infer that the record cash position in January 2024 was intended to address the expansion in debt servicing. (Figure 5, lowest visual)

 

However, the BoTr reduced its financing from Php 900.7 billion in 2023 to Php 737 billion in 2024, a decline of Php 164.1 billion.

 

V. Government Spending: The Primary Source of Inflation

 

Economist Daniel Lacalle wrote, (bold added)

 

The only real cause of inflation is government spending. While banks can generate money -credit- through lending, they rely on projects and investments to support these loans. Banks cannot create money to bail themselves out. No financial entity would go bankrupt then. In fact, banks’ largest asset imbalance comes from lending at rates below the cost of risk and having government loans and bonds as “no-risk” investments, two things that are imposed by regulation, law, and central bank planning. Meanwhile, the state does issue more currency to disguise its fiscal imbalances and bail itself out, using regulation, legislation, and coercion to impose the use of its own form of money (Lacalle, 2024)

 

How does the government finance its deficits?

Figure 6

 

First, it borrows savings from the public (mostly households) through the capital markets. Despite the sustained expansion in bank credit, the secular downtrend in deposit liability growth in the banking system persisted last February, decelerating from 5.98% in January to 5.2%.

 

The data reveals the declining liquidity position of savers (from the bank’s perspective).

 

Second, since the government has decided to fund its projects with domestic currency, it has relied on the banking system. Net Claims on the Central Government by banks grew by 12.05% year over year last February to Php 5.02 trillion—slightly lower than the record of Php 5.2 trillion in December 2023.

 

Third, since the Pandemic recession, the BSP has taken a subordinate role in financing the government. Net Claims on the Central Government by the BSP expanded by 15.8% to Php 850 billion last March—the third highest on record.

 

So why is the government and the BSP assiduously injecting liquidity when a recession is not at work?

Increasing currency issuance to fund the government’s spending spree magnifies aggregate demand even as it doesn’t contribute to raising output. Rising prices or higher inflation, therefore, are necessary repercussions of government spending.

Needless to say, the erosion of savings stems from the crowding out effect of deficit spending and its natural ramification—inflation.

VI. Surging Fiscal Deficit Weakens the PSE, the Philippine Peso and Bond Market

Figure 7

 

In any case, it is no surprise that this savings corrosive dynamic has resonated with the PSE’s declining volume.

 

But the public has been programmed to believe that supply-side bottlenecks have been the source. As such, this is supposedly 'transitory,' even as statistical inflation has been on an uptrend since 2015, and the BSP’s approach to allegedly "counteract" inflation has been through monetary policy—raising rates, which theoretically should raise the cost of borrowing and reduce aggregate demand.

 

The BSP’s "demonstrated preference" or "action speaks louder than words” exposes the true nature of monetary aspects of inflation (justified by fiscal activities).

 

The BSP also claimed that they would rise to the occasion to control FX volatility, even as the USD-Philippine peso surged beyond the Php 57 level or their previous 'Maginot Line.' They can certainly stem interim volatility by using up their reserves or accessing FX swap lines or other tools in the central bank toolkit, such as Other Reserve Assets (ORA), but they won’t stop the tide.

 

This savings-corrosive dynamic should also serve as a barrier to improvements in the domestic bond markets. The Philippine bond market is the second smallest in Asia, according to Asian Bonds Online.

 

In any case, the increasing use of resources and finances by the government results in reduced access for the private sector.

 

It should come as no surprise that the diminished support from savings only increases systemic risks.

___

References

 

Daniel Lacalle, Why the U.S. Public Debt Is Unsustainable and It Is Destroying The Middle Class, April 7, 2024

 

Prudent Investor Newsletter, 1Q 2021 GDP: A Statistic of Government Spending, Debt, Bailouts, and the BSP’s Financial Repression May 16, 2021, Blogspot

 

Carmen M. Reinhart and Kenneth S. Rogoff, The Forgotten History of Domestic Debt, NBER Working Paper No. 13946 April 2008 JEL No. E6,F3,N0, NBER.org

 

Bureau of Treasury, BULLETIN NO. 001 – 2018 (2014/12 - 2018/03) NATIONAL GOVERNMENT DEBT STATISTICAL BULLETIN, Bureau of Treasury June 2018, p. 4 to 6 Treasury.gov.ph

 

Department of Budget and Management, FINANCING OF NATIONAL GOVERNMENT EXPENDITURES, March 2012, dbm.gov.ph

 

Office of the Ombudsman I. Basic Concepts in Budgeting, Chapter 1 December 2012 Ombudsman.gov.ph

 

Daniel Lacalle, Governments could stop inflation if they wanted. They will not.; April 21,2024 www.dlacalle.com