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

 

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

 In this issue:

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

I. Crisis Without a Crisis

II. Oil Shock Politics and Organized Interests

III. The Ratchet Effect of Crisis Policy

IV. The Oil Shock Is Already Affecting the Real Economy

V. When Price Signals Are Suppressed

VI. Interventions Beget Interventions

VII. Markets Are Already Responding

VIII. Conclusion: Deepening Interventions Intensify Systemic Fragility 

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

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

I. Crisis Without a Crisis 

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

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

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

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

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

At the same time, the political debate is widening. 

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

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

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

II. Oil Shock Politics and Organized Interests 

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

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

Energy shocks tend to accelerate this process. Some examples: 

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

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

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

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

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

III. The Ratchet Effect of Crisis Policy 

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

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

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

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

The Philippines’ pandemic episode illustrates this dynamic clearly.

Figure 1

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

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

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

Energy shocks historically amplify this ratchet dynamic. 

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

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

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

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

IV. The Oil Shock Is Already Affecting the Real Economy 

Signs of strain were emerging. 

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

Transport activity is now reflecting the same pressures. 

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

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

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

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

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

V. When Price Signals Are Suppressed 

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

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

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

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

Producers may reduce supply when prices no longer cover costs. 

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

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

Without calculation, economic activity is impossible. 

VI. Interventions Beget Interventions 

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

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

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

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

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

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

VII. Markets Are Already Responding 

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

Figure 2

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

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

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

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

Figure 3

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

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

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

Figure 4

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

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

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

VIII. Conclusion: Deepening Interventions Intensify Systemic Fragility 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Mounting Global Financial Instability, The UK Pension Industry Bailout; Entrenching Forces of Inflation

 Mounting Global Financial Instability, The UK Pension Industry Bailout; Entrenching Forces of Inflation 

 

The speed of the plunging currencies of China, Japan, and Europe (or the surging USD) makes the world vulnerable to a sudden stop and subsequently, a crisis. 

 

That was from this author last week.  

 

Are the following recent events the proverbial writing on the wall? (bold added) 

 

Euronews/Reuters, September 21: LONDON -The Bank of England stepped into Britain’s bond market to stem a market rout, pledging to buy around 65 billion pounds ($69 billion) of long-dated gilts after the new government’s tax cut plans triggered the biggest sell-off in decades. Citing potential risks to the stability of the financial system, the BoE also delayed on Wednesday the start of a programme to sell down its 838 billion pounds ($891 billion) of government bond holdings, which had been due to begin next week. “Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,” the BoE said. “This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.” 

 

Financial Times, September 29: A pension meltdown forced the Bank of England to intervene in gilt markets on Wednesday. Executives told the Financial Times that markets barely dodged a Lehman-Brothers-like collapse – but this time with your mum’s pension at the centre of the drama. Problems with “pension plumbing” are what caused the mess. The culprit is said to be a popular pension strategy called liability-driven investing, or LDI. Leverage is a key element of many LDI strategies, and are basically a way pension funds can look like they’re an annuity without making the full capital commitment of becoming one.  

As one would note, the developing market tumult starts with malinvestments funded by extensive leveraging, which are all products of the zero-bound rate or "easy money" regime and financial engineering. 

 

In the ten years through 2020, reports have indicated the UK pension industry's liabilities through their exposure to Liability Driven Investing (LDI) hedging strategies have tripled to £1.5 trillion ($1.7TN)!   

  

The industry's massive exposure to fixed income, derivatives, repos, and other forms of securitizations through leveraging made them increasingly fragile to extreme market volatility.  Thus, the sharp drop in bond prices and the sterling forced the industry to face a chain of collateral and margin calls, compelling the frantic and intense liquidations to raise cash! 

  

And with liquidity rapidly drying up, the Bank of England (BoE) attempted to stanch the bleeding with an incredible policy U-turn from the initial plan of Quantitative Tightening (reducing balance sheet) to Quantitative Easing (expansion again)!  Or, to infuse liquidity, it will buy instead of selling bonds.  

 

But there is no free lunch. 

 

Such subsidies have sent the UK's credit default swaps (CDS) to pandemic highs! 

 

And instead of pruning its assets, the BoE's balance sheet will rise further or remain at ALL-Time highs. 

 

And as liquidity in the treasury markets has been swiftly depleting, not only in the UK but in other major European sovereigns, including the US, sooner or later, these nations may also mimic the BoE. 

 

For the same reasons, South Korean authorities have floated to the public its intent to buy bonds. 

 

Xinhua, September 28: South Korea's finance ministry and the central bank said Wednesday that they will buy back government bonds later this week to tackle soaring bond yields. Senior officials from the Ministry of Economy and Finance, the Bank of Korea (BOK) and financial regulators had a meeting to deal with the recent volatility surge in the financial market. The finance ministry decided to buy back 2 trillion won (1.4 billion U.S. dollars) worth of government bonds on Friday, while the BOK will purchase Treasury bonds worth 3 trillion won (2.1 billion dollars) from the market Thursday. (bold added) 

 

So while many central banks may still be hiking, the unfolding events may prompt them to reconsider their present actions.  

 

They may slow or stop rate hikes altogether while reopening the tap of asset purchases for liquidity injections.  

 

Global financial markets have responded violently to the slight trimming of central bank assets of the Fed, ECB and BoJ, indicating the embedded fragility. 

 

And the more chaotic the events, the greater the likelihood that central banks may elect towards a 'pivot.' 

Yet, the other options authorities are likely to impose are a chain of interventions and eventual controls: currency or FX, capital, price and wage, trade, border/mobility, and even people. 

 

Let us cite some recent instances. 

 

The Bank of Japan (BoJ) reportedly exhausted some USD 19.6 billion in September to intervene in the currency market to support its currency, the yen. 

 

In support of the USD-Hong Kong peg, the Bangkok Post and SCMP reported a few days ago that the Hong Kong Monetary Authority intervened "in the market 32 times this year, buying a total of HK$215.035 billion and selling US$27.39 billion amid persistent capital outflows. Its current intervention has surpassed in size measures taken to support the weak Hong Kong dollar during the last interest-rate rise cycle when it bought HKcopy03.48 billion in 2018 and HK$22.13 billion in 2019." 

 

Taiwanese officials initially floated the idea of FX and a ban on short sales. Later, they denied this. 

 

Interventions to prop up domestic currencies have led to substantial declines in the US Treasury holdings of global central banks. 

 

Finally, as the energy crunch sweeps into Europe, member states have already embarked on bailing out consumers and producers. 

 

Yahoo/Bloomberg, September 21: Germany and the UK announced energy bailouts to avoid an economic collapse and take the sting out of soaring prices, with European governments spending 500 billion euros ($496 billion) by one estimate to help consumers and businesses…The bailouts announced in Berlin and London coincide with fresh estimates from the Bruegel think-tank that the total spend by European nations on easing the energy crisis for households and businesses is nearing 500 billion euros. The European Union’s 27 member states have so far earmarked 314 billion, not including other major spending like nationalization plans, it said 

 

Winter is coming, and we can only guess that the bailouts will intensify. 

 

So how will European authorities finance this, given the current climate? 

 

For these reasons, "inflation" would only become structurally embedded as the path-dependent stance of policymakers remains in favor of inflating the system. 

 

And yet one of the immediate backlashes from these bailouts is the developing fissure among member states of the Eurozone. 

 

But even if central banks "pivot," such conditions are unlikely to fuel the return of TINA. 

 

There is much to deal with, but we can't cover them at once.