Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning

 

Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence—especially in cases in which large short-term debts need to be rolled over continuously—is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!, confidence collapses, lenders disappear, and a crisis hits—Carmen Reinhart and Kenneth Rogoff 

In this Issue 

Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning

I. The BSP’s Sixth Cut and the Goldilocks-Sweet Spot Illusion

II. Data-Driven or Dogma-Driven? The Myth of Low-Rate Growth

III. The Pandemic Rescue Template Returns, The MSME Credit Gap

IV. Fintech’s Limits, Financial Concentration: Banking Cartel by Design

V. Treasury Market Plumbing: Who Really Benefits?

VI. Crowding Out: Corporate Issuers in Retreat

VII. The Free Lunch Illusion: Debt and Servicing Costs

VIII. Banks as the Heart of the Economy: Palpitations in the Plumbing

IX. Q2 2025 Bank Profit Plummets on Credit Loss Provisions

X. Conclusion: Goldilocks Faces the Three Bad Bears 

Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning 

The Bangko Sentral ng Pilipinas’ latest rate cut is a "Goldilocks" illusion masking a late-cycle reckoning driven by crowding out, surging leverage, and mounting stress in the financial system 

I. The BSP’s Sixth Cut and the Goldilocks-Sweet Spot Illusion 

Reinforcing its "easing cycle," the Bangko Sentral ng Pilipinas (BSP) cut policy rates last week—the sixth reduction since August 2024. Officials claimed they had reached a “sweet spot” or “Goldilocks level”—a rate neither inflationary nor restrictive to growth, as the Inquirer reported. 

We’ve used “sweet spot” before, but not as a compliment. In our framing, it signals ultra-loose monetary policy—part of a broader “Marcos-nomics stimulus” package that fuses fiscal, monetary, and FX regimes into a GDP-boosting mirage. A rescue narrative sold as reform. 

II. Data-Driven or Dogma-Driven? The Myth of Low-Rate Growth 

The idea that “low rates equal growth” has calcified into public gospel. 

But if that logic holds, why stop at 5%? Why not abolish interest rates altogether—and for good measure, tax 100% of interest income? By that theory, we’d borrow and spend our way to economic utopia. In short: Such (reductio ad absurdum) logic reduces policy to absurdity: prohibit savings, unleash debt, and expect utopia.

Figure 1

The BSP insists its decisions are data-driven. But have they been? Since the 1998 Asian Crisis, rate cuts have been the default posture. 

And since the 2007–2009 Global Financial Crisis, each successive cut has coincided with slowing headline GDP—through the pandemic recession and beyond. The decline was marginal at first, barely noticed. But post-pandemic, the illusion cracked. (Figure 1 upper pane)

A historic rescue package—Php2.3 trillion in injections, rate cuts, RRR reductions, a USD-PHP soft peg, and sweeping relief measures—combined with unprecedented deficit spending, triggered a temporary growth spike. This extraordinary intervention, combined with global reopening, briefly masked structural weaknesses. 

But since 2021, GDP has resumed its downward drift, with the deceleration becoming conspicuous through Q2 2025. Inflation forced the BSP to hike rates, only to restart its easing cycle in 2024. 

So where is the evidence that low rates boost the economy?

III. The Pandemic Rescue Template Returns, The MSME Credit Gap 

Today’s “sweet spot” eerily mirrors the pandemic-era rescue template—minus the direct injections and relief measures. For now. 

Meanwhile, over half the population still self-identifies as borderline or poor (self-rated poverty surveys—SWS and OCTA). 

GDP, as a measure, fails to capture this disconnect—possibly built on flawed inputs, questionable categorization and assumptions, as well as politically convenient calculations. 

Meanwhile, the BSP’s easy money regime and regulatory bias have allowed banks to monopolize the financial system, now accounting for 83% of total financial assets as of Q2 2025. (Figure 1, lower graph) 

Yet MSMEs—the backbone of employment at 67% (as of 2023, DTI)—remain sidelined. 

Ironically, Republic Act No. 9501 mandates banks to lend 10% of their portfolio to MSMEs (8% to micro and small, 2% to medium enterprises).

Figure 2

But compliance has collapsed—from 8.5% in 2010 to just 4.63% in Q1 2025. (Figure 2, topmost image) 

Banks, unable to price risk appropriately, prefer paying penalties over lending to the sector. The result: the credit boom inflating GDP primarily benefits 0.37% of firms—the large enterprises that employ only a third of workers. 

While RA 9501 mandates banks to allocate 10% of their loan portfolio to MSMEs, BSP regulations restrict risk-based pricing—directly through caps on consumer and financing loans (BSP Circular 1133) and indirectly in MSME lending through microfinance rules (Circulars 272, 364, 409, and related issuances).   

Again, unable to fully price in higher default risks, banks often find it cheaper to pay penalties than to comply. 

IV. Fintech’s Limits, Financial Concentration: Banking Cartel by Design 

At the same time, banks are aggressively expanding into consumer credit, while the unbanked majority continues to rely on the informal sector at usurious or punitive rates. 

Fintech e-wallets have gained traction, but they remain mostly transactional platforms. Banks, by contrast, are custodial institutions. Even if convergence is inevitable, bridging the informal credit gap will remain elusive unless rates reflect real distribution and collection risks.

This convergence may democratize leverage—but banks still dominate credit usage, reinforcing a top-heavy system. 

Deepening concentration, paired with price restrictions, resembles a cartel. A BSP-led cartel. 

And the first beneficiaries of this low-rate regime? Large enterprises and monied consumers. 

V. Treasury Market Plumbing: Who Really Benefits? 

And like any cartel, it relies not only on market power but also on control of the pipes—the very plumbing of the financial system, now evident in the Treasury market 

The Bangko Sentral ng Pilipinas has dressed up its latest rate cut as part of a “Goldilocks easing cycle,” but the bond market tells a different story.

Even before the policy shift, the Philippine BVAL Treasury yield curve had been flattening month after month, with long rates falling faster than the front end.  (Figure 2, middle and lower charts) 

That is not a picture of renewed growth but of markets bracing for a slowdown and disinflation. 

The rate cut simply ratified what the curve had preemptively declared: that the economy was softening, and liquidity needed to be recalibrated.

Figure 3

From the Treasury market’s perspective, the real beneficiaries weren’t households or corporates—they were institutional actors navigating a crowded, distorted market. 

Trading volumes at the Philippine Treasury market raced to all-time highs in August, just before and during the cut! (Figure 3, topmost diagram) 

This wasn’t retail exuberance—it was plumbing. 

BSP’s direct and indirect liquidity injections, coupled with foreign inflows chasing carry (data from ADB Online) amid global easing and macro hedges created a bid-heavy environment. The rate cut amplified this dynamic, lubricating government borrowing while sidelining private credit. (Figure 3, middle visual) 

VI. Crowding Out: Corporate Issuers in Retreat 

Meanwhile, the collateral damage is clear: corporate bond issuance has been trending downward, regardless of interest rate levels—both in nominal terms and as a share of local currency debt. (Figure 3, lowest window) 

This is evidence of the crowding-out syndrome, which suggests that BSP easing isn’t reviving private investment—it’s merely accommodating fiscal expansion. 

In the cui bono calculus, the winners of rate cuts are clear: the state, the banks, and foreign macro hedgers. 

The losers? Domestic firms, left behind in a market—where easing no longer means access. 

VII. The Free Lunch Illusion: Debt and Servicing Costs

Figure 4

The deeper reason behind the BSP’s ongoing financial plumbing lies in social democracy’s favorite illusion: the free lunch politics. 

Pandemic-era deficit spending has pushed public debt to historic highs (Php 17.27 trillion in June), and with it, the burden of debt servicing. (Figure 4, topmost chart) 

July’s figures—due next week—may breach Php 17.4 trillion. 

Even with slower amortizations temporarily easing the burden in 2025, interest payments for the first seven months have already set a record.

Rising debt means rising servicing obligations—even at the zero bound. The illusion of cheap debt is just that: an illusion. 

Crowding out isn’t just theoretical. 

It’s visible in the real economy—where MSMEs and half the population (per self-poverty surveys) are squeezed—and in the capital markets, where even the largest firms are feeling the pinch. 

The entropy in financial performance among PSE-listed firms, especially the PSEi 30, underscores that the spillover has reached even the politically privileged class. (see previous discussion—references) 

Monthly returns of the PSEi 30 similarly reflect the waning impact of the BSP’s cumulative easing measures since 2009. (Figure 4, middle image) 

In a world of scarcity, there is no such thing as a permanent free lunch. 

VIII. Banks as the Heart of the Economy: Palpitations in the Plumbing 

If the government is the brain of the political economy, banks are its heart. And the pulse is showing increasing signs of palpitations.

The banking system’s books reveal the scale of the plumbing, most visible in the record-high net claims on central government (NCoCG) held by the banking system and Other Financial Corporations (OFCs). 

Bank NCoCG surged 7.5% YoY to an all-time high Php 5.591 trillion in Q2 2025, pushing Held-to-Maturity (HTM) assets up 1.8% YoY to a milestone Php 4.075 trillion. (Figure 4, lowest graph)

Figure 5 

OFCs saw an even sharper jump—14.7% in Q1 to a record Php 2.7 trillion! (Figure 5, topmost diagram) 

According to the BSP, OFCs are composed of non-money market investment funds, other financial intermediaries (excluding insurance corporations and pension funds), financial auxiliaries, captive financial institutions and money lenders, insurance corporations, and pension funds. 

Yet despite these massive reallocations—and even with banks drawing a staggering Php 189 billion from their freed-up reserves (Claims on Other Depository Corporations) after March’s RRR cut—liquidity remains tight. (Also discussed last August, see references) (Figure 5, middle chart) 

Cash reserves continue to decline. Though cash-to-deposit ratios bounced in June from May’s all-time low, the trend remains downward—accelerating even as RRR rates fall to 5%. (Figure 5, lowest image) 

Liquid assets-to-deposit ratios have slumped to levels last seen in May 2020, effectively nullifying the supposed benefits of the BSP’s Php 2.3 trillion pandemic-era injections. 

This strain is now reflected in bank stocks and the financial index—dragging down the PSE and the PSEi 30. 

Goldilocks, eh? 

After the rate cut, the BSP immediately floated the possibility of a third RRR reduction—“probably not that soon.” Highly doubtful. Odds are it lands in Q4 2025 or Q1 2026. 

But even if the BSP dismantles the Reserve Requirement entirely, unless it confronts the root cause—the Keynesian dogma that credit-financed spending is a growth elixir—the downtrend will persist. 

At zero RRR, the central bank will run out of excuses. And the risk of bank runs will amplify.

IX. Q2 2025 Bank Profit Plummets on Credit Loss Provisions

Figure 6 

The toll on banks is already visible—profits are unraveling. From +10.96% in Q1 to -1.96% in Q2.  (Figure 6, upper visual) 

The culprit? 

Losses on financial assets—driven by surging provisions for credit losses, which ballooned 89.7% to Php 43.78 billion in Q2. That’s pandemic-recession territory—December 2020. (Figure 6, lower graph) 

X. Conclusion: Goldilocks Faces the Three Bad Bears 

The cat is out of the bag. 

The “stimulative effect” is a political smokescreen—designed to rescue banks and the elite network tethered to them. It’s also a justification for continued deficit spending and the rising debt service that comes with it. 

But “sweet spots” don’t last. They decay—subject to the law of diminishing returns. 

Paradoxically, under the Goldilocks fairy tale, there were three bears. In our case: three ‘bad’ bears:

• Crowding out and malinvestments
• Surging systemic leverage
• Benchmark-ism to sanitize worsening fundamentals 

Even the Bank for International Settlements has quietly replaced Philippine real estate pricing bellwethers with BSP’s version—one that paints booming prices over record vacancies. 

Nonetheless, the bears are already in the house. The porridge is cold. And the bedtime story is over. What remains is the reckoning—and the question of who’s prepared to face it without the comfort of fairy tales 

All signs point to a late-stage business cycle in motion. 

___

references 

Prudent Investor Newsletters, Q2–1H Debt-Fueled PSEi 30 Performance Disconnects from GDP—What Could Go Wrong, August 24, 2025 Substack 

Prudent Investor Newsletters, Philippine Banks: June’s Financial Losses and Liquidity Strains Expose Late-Cycle Fragility, August 17, 2025 Substack

 

The 5.5% Q2 GDP Mirage: How Debt-Fueled Deficit Spending Masks a Slowing Economy

National product statistics have been used widely in recent years as a reflection of the total product of society and even to indicate the state of “economic welfare.” These statistics cannot be used to frame or test economic theory, for one thing because they are an inchoate mixture of grossness and netness and because no objectively measurable “price level” exists that can be used as an accurate “deflator” to obtain statistics of some form of aggregate physical output. National product statistics, however, may be useful to the economic historian in describing or analyzing an historical period. Even so, they are highly misleading as currently used—Murray N. Rothbard 

 

In this issue: A brief but blistering breakdown of the 5.5% GDP mirage. 

The 5.5% Q2 GDP Mirage: How Debt-Fueled Deficit Spending Masks a Slowing Economy

I. Q2 GDP: A Mirage of Momentum

II. The Secondary Trendline: Pandemic’s Lingering Scar; GDP: A Flawed Lens, Still Worshipped

III. Economic Wet Dreams, Statistical Kabuki and Confirmation Bias

IV. The GDP Illusion, Poverty Amid Growth: Cui Bono?

V. Policy Theater, the Real Economy and The Credit–Consumption Black Hole

VI. Jobs Boom, GDP Drag

VII. Policy Vaudeville: July .9% Inflation, MSRP and the Php 20 Rice Rollout

VIII. Core vs Headline CPI: A Divergence Worth Watching

IX. Deflator Manipulation, GDP Inflation

X. Inflation-GDP Forecasting as Folklore

XI. The Official Narrative: A Celebration of Minor Gains

XII. The Real Driver: Government Spending, Not Households

XIII. The Consumer Illusion: Retail as a Misleading Proxy

XIV. Expenditure Breakdown: Only Government Spending Beat the Headline

XV. Inconvenient Truth: The Rise of Big Government—Crowding Out in Action, The Establishment’s Blind Spots and Tunnel Vision

XVI. More Inconvenient Truths: Debt-Fueled GDP—A Statistical Shell Game

XVII. The Debt-Deficit Trap: No Way Out Without Pain—Sugarcoating Future Pain

XVIII. Tail-End Sectors Surge: Agriculture and Real Estate Rebound

XIX. The Policy Sweet Spot—and Its Expiry Date: Diminishing Returns of Stimulus

XX. Conclusion: Narrative Engineering and the Keynesian Free Lunch Trap

XXI. Post Script: The Market’s Quiet Rebuttal: Flattening Curve Exposes GDP Mirage 

The 5.5% Q2 GDP Mirage: How Debt-Fueled Deficit Spending Masks a Slowing Economy 

Beneath the headline print lies a fragile economy propped up by CPI suppression, statistical distortion, and unsustainable public outlays.

I. Q2 GDP: A Mirage of Momentum 

The Philippines clocked in a Q2 GDP of 5.5% — higher than Q1 2025’s 5.4% but lower than Q2 2024’s 6.5%. 

For the first half, GDP posted a 5.4% expansion, above the 5.2% of the second half of 2024 but still below the 6.2% seen in the first half of 2024.

Figure 1

While this was largely in line with consensus expectations, what is rarely mentioned is that both nominal and real GDP remain locked to a weaker post-2020 secondary trendline — a legacy of the pandemic recession. (Figure 1, topmost graph) 

II. The Secondary Trendline: Pandemic’s Lingering Scar; GDP: A Flawed Lens, Still Worshipped 

Contra the establishment narrative, this lower secondary trend illustrates a slowing pace of increases—a theme we’ve repeatedly flagged. 

GDP now appears to be testing its own support level, underscoring the fragility of this fledgling trendline and the risk of a downside break. 

Though we’re not fans of GDP as a concept, we analyze it within the dominant lens—because everyone else treats it as gospel. 

But let’s be clear: GDP is a base effect—a percentage change from comparative output or expenditure figures from the same period a year ago. 

III. Economic Wet Dreams, Statistical Kabuki and Confirmation Bias 

When pundits claim GDP will breach 6% or that the Philippines is nearing “upper middle class” status, they’re implying that aside from seasonal Q4 strength, the rest of the year will recapture the original trendline and stay there. What a wet dream! 

These forecasts come from either practitioners afflicted by the Dunning-Kruger syndrome or sheer propagandists. 

The PSA’s national accounts data offer contradictory insights. But this isn’t just about statistics—it’s about confirmation bias. The public is told what it wants to hear. 

IV. The GDP Illusion, Poverty Amid Growth: Cui Bono? 

GDP is a quantitative estimate—built on assumptions, inputs, and econometric calculations. It hopes to objectively capture facts on the ground, but in aggregate, it overlooks individual preferences, distributional effects, financing mechanisms, and policy responses. 

Worse, its components (from rice to cars to Netflix) are averaged in ways that can distort reality. Aside, input or computational errors, or even manipulation, are always possible. 

Yes, GDP may be 5.5%, but SWS’s June self-rated poverty survey still shows 49% of Filipino families identifying as poor, with 10% on the borderline. While this is sharply down from December 2024’s 63%, the numbers remain considerable. (Figure 1, middle image) 

So, who benefits from the recent inflation decline that distilled into a 5.5% GDP? 

At a glance, the 41%—but even within this group, gains are uneven. Or, even within the 41% who are “non-poor,” gains are concentrated among larger winners while most see only modest improvements (see conclusion) 

V. Policy Theater, the Real Economy and The Credit–Consumption Black Hole 

The real economy doesn’t operate in a vacuum. It is a product of interactions shaped by both incumbent and anticipated socio-political and economic policies. 

The BSP began its easing cycle in 2H 2024, delivering four rate cuts (the fifth in June), two reserve requirement ratio cuts, doubled deposit insurance, a soft peg defense of the peso, and a new property benchmark that eviscerated real estate deflation. 

Theoretically, the economy ought to be functioning within a policy ‘sweet spot’. 

Despite blistering nominal growth and record-high universal-commercial bank credit—driven by consumer lending—real GDP barely budged. (Figure 1, lowest pane) 

Interest rates were hardly a constraint. Bank lending surged even during the 2022–23 rate hikes. Yet the policy transmission mechanism seems blunted: credit expansion hasn’t translated into consumer spending, rising prices or real GDP growth. 

Banking sector balance sheets suggest a black hole between credit and the economy—likely a repercussion of overleveraging or mounting balance sheet imbalances. 

More financial easing won’t fix this bottleneck. It’ll worsen it. 

VI. Jobs Boom, GDP Drag

Figure 2

We’re also treated to the spectacle of near-record employment. In June, the employed population reached its second-highest level since December 2023, driving the employment rate to 96.3% and lifting Q2’s average to 96.11%. 

That should be good news. But is it? If so, why has headline GDP moved in the opposite direction? (Figure 2, topmost chart) 

This labor boom coincided with over 25% credit card growth—normally a recipe for inflation (too much money chasing too few goods). (Figure 2, middle visual)

Instead, CPI fell, averaging just 1.4% in Q2. Near-record employment met falling prices, with barely a whisper from the consensus about softening demand. (Figure 2, lowest diagram)

VII. Policy Vaudeville: July .9% Inflation, MSRP and the Php 20 Rice Rollout

Authorities reported July inflation at 0.9%—approaching 2019 lows. But this is statistical kabuki, driven by price controls and weak demand.

Figure 3

Rice prices, partly due to imports, were already falling before January’s MSRP. The Php 20 rice rollout only deepened the deflation. (Figure 3, topmost diagram)

July saw rice prices drop 15.9%. Despite earlier MSRP, meat prices remained elevated—9.1% in June, 8.8% in July.

Because rice carries an 8.87% weight in the CPI basket, its deflation dragged down Food CPI (34.78% weight), driving July’s headline CPI to 2019 lows.

This divergence reveals the optics. MSRP failed on pork, so it was quietly lifted. But for rice, it was spun as policy success—piggybacking on slowing demand, punctuated by the Php 20 rollout even though it simply reinforced a downtrend already in motion.

VIII. Core vs Headline CPI: A Divergence Worth Watching

The growing gap between core and headline CPI is telling. The negative spread is now the widest since June 2022. Historically, persistent negative spreads have signaled inflection points—2015–16, 2019–2020, 2023. (Figure 3, middle window)

Moreover, MoM changes in the non-food and energy core CPI suggest consolidation and its potential terminal phase. An impending breakout looms—implying rising prices across a broader range of goods. (Figure 3, lowest graph)

IX. Deflator Manipulation, GDP Inflation 

Here’s the kicker: statistical histrionics are inflating GDP by repressing the deflator.

Real GDP is not a raw measure of economic output—it’s a ratio: nominal GDP divided by the GDP deflator. That deflator reflects price levels across the economy. Push the deflator down, and—voilà—real GDP pops up, even if nominal growth hasn’t changed. 

Q2’s 5.5% real GDP print looks better partly because the deflator was suppressed by statistical and policy factors: rice imports, price controls, Php 20 rice rollouts or targeted subsidies, and peso defense all helped drag reported inflation to multi-year lows. Rice alone, with an 8.87% CPI weight, deflated nearly 16% in July, pulling down the broader food CPI and, by extension, the GDP deflator. 

If the deflator had stayed closer to its Q1 level, Q2 real GDP would likely have landed closer to the 4.5–4.8% range—well below the official figure. This isn’t economic magic; it’s arithmetic. The “growth” came not from a sudden burst in output, but from lowering the measuring stick. 

Q2 GDP is another "benchmark-ism" in action. 

X. Inflation-GDP Forecasting as Folklore 

Amused by media’s enthrallment with government inflation forecasts, we noted at X.com: "Inflation forecasting is the game of ‘pin the tail on the donkey’ — a guess on a statistical guess, dressed up as science. The mainstream reinforces an Overton-window narrative that serves more as diversion than insight" 

The real economy—fragile, bifurcated, and policy-distorted—remains unseen.

XI. The Official Narrative: A Celebration of Minor Gains 

The establishment line, echoed by Reuters and Philstar, goes something like this: 

"Slowing inflation also helped support household consumption, which rose 5.5% year-on-year in the second quarter, the fastest pace since the first quarter of 2023" … 

"Faster farm output and strong consumer spending helped the Philippine economy expand by 5.5 percent in the second quarter"

Figure 4

But beneath the headlines lies a more sobering truth: a one-basis-point rise in household spending growth has been heralded as a “critical factor” behind the GDP expansion. 

While the statement is factually correct, it masks the reality: household spending as a share of GDP has been rangebound since 2023, showing no real breakout in momentum. 

XII. The Real Driver: Government Spending, Not Households 

The true engine of Q2 GDP was government spending, which rose 8.7%, down from 18.7% in Q1 but still dominant. (Figure 4, topmost window) 

Over the past five quarters, government spending has averaged 10.7%, dwarfing household consumption’s 5.1%.  

This imbalance exposes the fragility of the consumer-led growth narrative. When per capita metrics are used, the illusion fades further: Real household per capita GDP was just 4.5% in Q2, barely above Q1’s 4.4%, and well below Q1 2023’s 5.5%.

This per capita trend has been flatlining at secondary trendline support, locked in an L-shaped pattern—inertia, not resurgence—and still drifting beneath its pre-pandemic exponential trend.  The per capita household consumption “L-shape” shows spending per person collapsing during the pandemic and never meaningfully recovering — a flatline that belies the GDP growth narrative. (Figure 4, middle graph)

XIII. The Consumer Illusion: Retail as a Misleading Proxy

Despite the BSP’s promotion of property prices as a proxy for consumer health—and the Overton Window’s deafening hallelujahs—SM Prime’s Q2 results reveal persistent consumer strain: (Figure 4, lowest chart) 

• Rent revenues rose only 6.3%, the weakest since the pandemic recession in Q1 2021.
• Property sales stagnated, up just 0.2% despite new malls in 2024 and 2025 

So much for the “strong consumer” thesis. 

XIV. Expenditure Breakdown: Only Government Spending Beat the Headline 

In the PSA’s real GDP expenditure table, only government spending exceeded the headline:

• Household: 5.5%
• Gross capital formation: 0.6%
• Exports: 4.4%
• Imports: 2.9%
• Government: 8.7% 

Notably, government spending excludes public construction and private allocations to public projects (e.g., PPPs). Due to the May mid-term elections, real public construction GDP collapsed by 8.2%. 

XV. Inconvenient Truth: The Rise of Big Government—Crowding Out in Action, The Establishment’s Blind Spots and Tunnel Vision

Figure 5

The first half of 2025 exposes a structural shift the mainstream won’t touch:  Government spending’s share of GDP has surged to an all-time high! 

Meanwhile, consumer driven GDP continues its long descent—down since 2001. (Figure 5, topmost diagram) 

As the public sector’s footprint swells, the private sector’s relative role contracts. This isn’t theoretical crowding out. It’s empirical. It’s unfolding in real time. (Figure 5, middle image) 

Importantly, this is not a conspiracy theory—these are government’s own data. Yet the establishment’s analysts and bank economists appear blind to it. 

Proof? 

Banks are shifting focus toward consumer lending, even as the consumer share of GDP trends lower. 

The “build-and-they-will-come” crowd remains locked in a form of tunnel vision, steadfastly clinging to a decaying trend. 

XVI. More Inconvenient Truths: Debt-Fueled GDP—A Statistical Shell Game 

Government has no wealth of its own. It extracts from the productive sector—through taxes, borrowing (future taxes), and inflation. 

As Big Government expands, so does public debt — now at Php 17.3 trillion as of June! 

The June debt increase annualizes to Php 1.784 trillion — eerily close to the Php 1.954 trillion NGDP gain over the past four quarters (Q3 2024–Q2 2025). (Figure 5, lowest visual)

Figure 6 

That’s a mere Php 170 billion gap. Translation: debt accounts for 91.3% of NGDP’s statistical value-added. 

The 91.3% “debt as share of NGDP increase” means almost all of the year-on-year nominal GDP expansion came from government borrowing, not private sector growth — in other words, strip out the deficit spending, and the economy’s headline size barely moved. 

Yet this spread has collapsed to its lowest level since the pandemic recession. (Figure 6, upper pane) 

This isn’t growth. It’s leverage masquerading as output — GDP propped up almost entirely by deficit spending! 

This also reinforces the government’s drift toward centralization—where state expansion becomes the default engine of the economy. 

XVII. The Debt-Deficit Trap: No Way Out Without Pain—Sugarcoating Future Pain 

It’s unrealistic for the administration to claim it can “slowly bring down” debt while GDP remains tethered to deficit spending. 

Debt-to-GDP ratios are used to soothe public concern—but the same debt is inflating GDP through government outlays. It’s a circular metric: the numerator props up the denominator. 

According to the Bureau of Treasury, Debt-to-GDP hit 63.1% in Q2 2025—highest since 2005! 

Ironically, authorities quietly raised the debt-to-GDP threshold from 60% to 70% in August—an implicit admission that the old ceiling is no longer defensible. 

This is a borrow-now, pay-later model. Short-term optics are prioritized, while future GDP is sacrificed. 

Even the PSA’s long-term trendline reflects this drag—confirming the trajectory of diminishing returns. 

And we haven’t even touched banking debt expansion, which should have supported both government and elite private sector financing. Instead, it’s compounding systemic fragility. 

We’re no fans of government statistics—but even their own numbers tell the story. Cherry-picking to sugarcoat the truth isn’t analysis. It’s deception. And it won’t hide the pain of massive malinvestments. 

XVIII. Tail-End Sectors Surge: Agriculture and Real Estate Rebound 

From the industry side, Q2 saw surprising strength from GDP’s tailenders: 

Agriculture GDP spiked 7%, the highest since Q2 2011’s 8.3%. Volatile by nature, such spikes often precede plunges. 

Real estate GDP nearly doubled from Q1’s 3.7% to 6.1%, though still below Q2 2024’s 7.7%. (Figure 6, lower graph) 

Yet initial reports of listed property developers tell a different story: 

-Aggregate real estate sales: +4.1% (Megaworld +10.5%, Filinvest -4.96%, SMPH +0.02%) 

-Total revenues: +5.23% (Megaworld +9.6%, Filinvest -1.2%, SMPH +3.83%)

These figures lag behind nominal GDP’s 7.9%, suggesting statistical embellishment aligned with BSP’s agenda. 

Benchmark-ism strikes again!  

XIX. The Policy Sweet Spot—and Its Expiry Date: Diminishing Returns of Stimulus 

Technically, Q2 and 1H mark the ‘sweet spot’ of policy stimulus—BSP’s easy money paired with fiscal expansion. But artificial boosts yield diminishing returns. 

A 5.5% print reveals fragility more than resilience. 

Once again, the entrenched reliance on debt-financed deficit spending inflates GDP at the expense of future stability—while compounding systemic risk.  

XX. Conclusion: Narrative Engineering and the Keynesian Free Lunch Trap 

GDP has been sculpted to serve the establishment’s preferred storyline: 

• CPI suppression to inflate real GDP
• Overstated gains in agriculture and real estate
• Escalating reliance on deficit spending 

Repressing CPI to pad GDP isn’t stewardship—it’s pantomine. A calculated communication strategy designed to preserve public confidence through statistical theater. 

Within this top-down, social-democratic Keynesian spending framework, the objective is unmistakable: Cheap access to household savings to bankroll political vanity projects. These are the hallmarks of free lunch politics. 

The illusion of growth props up the illusion of competence. And both are running on borrowed time. 

Yet, who benefits from this GDP? 

Not the average household. Not the productive base. As The Inquirer.net reports: "The combined wealth of the country’s 50 richest rose by more than 6 percent to $86 billion this year from $80.8 billion in 2024, as the economy got some lift from robust domestic demand and higher infrastructure investments, according to Forbes magazine." 

GDP growth has become a redistribution mechanism—upward. A scoreboard for elite extraction, not shared prosperity. 

Without restraint on free lunch politics, the Philippines is barreling toward a debt crisis. 

XXI. Post Script: The Market’s Quiet Rebuttal: Flattening Curve Exposes GDP Mirage 

Despite headline growth figures and establishment commentary echoing official optimism, institutional traders—both local and foreign—remain unconvinced by the Overton Window of managed optimism rhetoric. 

The market’s posture suggests skepticism toward the government’s narrative of resilience.

Figure 7 

Following a Q2 steepening (end-June Q2 vs. end-March Q1), the Philippine Treasury curve has flattened in August (mid-Q3), though it remains steep in absolute terms. While the curve remains steep overall, the recent shift reveals important nuances: 

Short end (T-bills): August T-bill yields are marginally lower than June Q2 but still above March Q1 levels. 

Belly (3–5 years): Rates have been largely static or inert, showing no strong conviction on medium-term growth or market indecision 

Long end (10 years): Yields have fallen sharply since March and June, suggesting softer growth expectations or rising demand for duration. 

Ultra-long (20–25 years): Rates remain elevated and sticky, reflecting structural fiscal and inflation concerns. 

After July’s 0.9% CPI print, the peso staged a brief rally, yet the USDPHP remains above its March lows. Meanwhile, 3-month T-bill rates softened slightly post-CPI, hinting at the BSP’s intent to maintain its easing stance. 

Q3’s bearish flattening underscores rising risks of economic slowdown amid stubborn inflation or stagflation. 

The divergence between market pricing and statistical growth exposes the mirage of Q2 GDP—more optical than operational, more narrative than organic.

  

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback

As the cycle nears its end, a country is typically beset by chronic fiscal deficits. Low domestic savings and current account deficits render it dependent on foreign lenders. As lenders become wary, the average maturity of the public debt shortens. The central bank finds it impossible to set interest rates at the level which balances the needs of both creditors and borrowers. Once interest rates rise, governments’ debt servicing costs become increasingly onerous. Government finances come to resemble a Ponzi scheme, with new debt being issued to service old borrowing—Edward Chancellor 

In this issue

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback

I. Introduction: Evading the Real Issue

II. The Fallacies Behind the CMEPA’s Defense

A. False Equivalence

B. Red Herring

C. Categorical Error

D. Begging the Question

E. Ignoring Second-Order Effects (Bastiat’s “Seen and Unseen”)

F. Appeal to the General (Overgeneralization)

III. The Diminishing Role of Time and Savings Deposits in M2 and Bank Liabilities

IV. Defective Gross Domestic Savings, Near Record Savings-Investment Gap

V. Financing the ‘Twin Deficits’ with Record Systemic Leverage

VI. State-Driven Financial Repression: Time Deposits vs. RTBs & Pag-IBIG MP2

VII. Inflating Stock Market Bubbles: CMEPA’s Savers Lion’s Den

VIII. Conclusion: Sovereignty over Speculation, Economic Blowback 

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback 

Logical fallacies aren’t harmless—they shape policy narratives. In CMEPA’s case, they obscure financial repression and pave the way for systemic economic backlash. 

This is a follow-up on my original piece: The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design 

I. Introduction: Evading the Real Issue 

The Capital Market Efficiency Promotion Act (CMEPA) has stirred significant debate, not merely because of its tax provisions but because of what it signals about the evolving relationship between the state and citizen savings. 

While defenders of CMEPA claim it merely modernizes financial taxation and expands savings options, these arguments often rest on flawed logic and misleading equivalencies that mask the deeper issues: the erosion of true savings, the rise of speculation, and creeping state control over private capital.

Besides, in classical economic thought, savings is deferred consumption—a temporal anchor against uncertainty, a moral wager on future stability. Time-bound, low-risk instruments like term deposits have long served this function. They do not aspire; they buffer. When the state flattens the tax incentives protecting this buffer, it doesn’t merely tweak an equation—it alters the meaning of saving. 

II. The Fallacies Behind the CMEPA’s Defense 

CMEPA's defenders lean on several logical fallacies to support their case: 

A. False Equivalence: By equating time-bound savings with speculative financial assets such as stocks or REITs, proponents confuse two fundamentally different financial behaviors. Savings are deferred consumption; risk assets are bets on volatility. 

B. Red Herring: Arguments pointing to alternative investment vehicles like Pag-IBIG MP2 or Retail Treasury Bonds distract from the core concern: CMEPA disincentivizes bank-based, low-risk savings that traditionally fund long-term development. 

C. Categorical Error: To assume that financial markets can substitute for savings systems ignores the institutional role of savings in capital formation, stability, and intermediation. 

D. Begging the Question: CMEPA defenders assume what they must prove: that taxed savings instruments still count as savings (tax = savings or 1-1=2), or that savings will simply shift outside time deposits without consequence. This begs the question. 

It presumes that risk assets and government-managed schemes are natural substitutes for time deposits. It conflates taxation with neutrality, ignoring how incentives shape behavior.

In reality, aside from extraction, tax is a signal, not a passive overlay. And when the signal penalizes duration, it redefines savings itself. 

Worst, it also treats financial repression as benign without examining its structural damage to intermediation, capital formation, and systemic liquidity.

E. Ignoring Second-Order Effects (Bastiat’s “Seen and Unseen”) 

Defenders highlight only the seen—that capital might shift to “alternative” instruments like stocks or Pag-IBIG MP2. 

What is seen:

1. Lower taxes on REITs and stocks = more investment.

2. Flat tax on deposits = not new, fairness 

But they ignore the unseen: 

1. weakening of bank intermediation via the erosion of long-term bank funding,

2. The crowding out of private credit channels, and

3. The behavioral shift toward liquidity-chasing speculation, which gives rise to

4. increased market and economic volatility 

Policy must be judged not just by its immediate effects, but by its downstream damage. This is the classic Bastiat fallacy—what is unseen—the fragility, the distortion, the systemic cost—often matters more. 

F. Appeal to the General (Overgeneralization) 

CMEPA’s defenders argue that because some financial instruments like stocks, REITs, or Pag-IBIG MP2 exist, they can generally serve as adequate substitutes for traditional savings. 

But this overlooks key details: liquidity risk, volatility, transitional frictions or tensions, accessibility, ceilings, investor profile and behavioral inertia that constrain real-world reallocation. 

Not all instruments serve the same function—especially for households that need capital preservation over yield. 

This fallacy blurs crucial distinctions between risk assets and true savings vehicles. By appealing to broad categories, it sidesteps the very real limitations and risks of reallocating savings. In policy, the details are the difference between resilience and fragility. 

Policy design and evaluation demands specificity: Without disaggregated data on household savings patterns, bank funding structures, and instrument uptake, differentiating between resilience and fragility, the defense becomes narrative and rhetoric, not analysis. 

III. The Diminishing Role of Time and Savings Deposits in M2 and Bank Liabilities 

Since the BSP’s structural easing cycle began in the early 2000s, both the savings and time deposit shares of M2 have steadily declined. 

This erosion has profound implications for the liquidity foundations of the Philippine financial system. 

Figure 1 

Notably, time deposits briefly surged during two critical junctures: first, when the BSP’s policy rates hit record lows during the pandemic, and again when aggressive rate hikes resumed in 2022. Yet this rebound proved short-lived. (Figure 1, topmost pane) 

Subsequent M2 growth increasingly leaned on more liquid components—such as demand deposits and currency in circulation—rather than long-term savings. 

In effect, liquidity transformation has shifted away from stable deposits toward more volatile sources: demand-driven credit expansion and the banking system’s financing of government liabilities, as evidenced by the surge in net claims on the central government (NCoCG). (Figure 1, middle graph) 

The CMEPA tax will likely accelerate this liquidity vacuum by further penalizing traditional savings vehicles. 

This structural shift presents a systemic challenge. As deposits decline, credit expansion becomes increasingly unanchored from genuine savings. In tandem with both implicit liquidity support (via bank balance sheets) and direct quantitative easing (via the BSP), this dynamic becomes inherently inflationary and destabilizing. 

The dilemma is mirrored in bank balance sheets. 

The time deposit share of total bank liabilities has collapsed—from over 32% in 2008 to just 17.5% by mid-2022, before rebounding modestly in response to BSP’s tightening cycle. (Figure 1, lowest diagram) 

This plunge coincides with a decade of financial repression: persistently low real rates, high inflation, and the rise of state-directed instruments like RTBs, MP2, and PERA accounts. 

As traditional deposits dwindled, banks turned increasingly to borrowings to fill the liability gap. 

The share of bank borrowings from capital markets has been rising since 2015, ironically peaking just before the pandemic recession in 2019. This share temporarily declined to 5.4% by Q3 2023, as ‘tighter’ policy conditions set in. 

Yet as liquidity stress intensified, bank borrowing surged anew—hitting 7.9% in March 2025—before moderating after the BSP’s second leg of RRR cuts. 

In this context, what CMEPA promotes as capital market reform in practice amounts to an escalation of the erosion of the deposit base. It trades long-term stability for short-term borrowing, redirecting household savings away from private financial intermediation and into state debt. 

The result? A more fragile banking system, less private capital formation, and greater macro-financial risk. 

Moreover, these bank borrowings now compete directly with government financing needs and private sector credit demand—exacerbating the crowding-out effect and tightening liquidity conditions for the broader economy. 

This fragility is amplified by the growing concentration of liquidity within a handful of dominant players.

Figure 2

As of May, Philippine banks controlled 82% of total financial resources or assets, with universal-commercial banks accounting for 76%. (Figure 2, topmost image) 

Meanwhile, even as the M2-to-GDP ratio soared from 63% in 2019 to a pandemic-era peak of 76.2% in 2021, it dropped sharply to 66.3% by Q1 2025—a sign that not only has GDP become dependent on liquidity, but, importantly, money creation is no longer translating into real economic or savings growth. (Figure 2, middle chart) 

Taken together, as banks increasingly monopolize liquidity while time deposits diminish, the financial system becomes more fragile. It is precisely this growing instability that forced the BSP to roll out confidence-boosting measures—including the doubling of deposit insurance coverage and the second phase of the RRR cut. These are not signs of strength. They are signs of deepening systemic stress.

IV. Defective Gross Domestic Savings, Near Record Savings-Investment Gap 

At first glance, gross domestic savings (GDS) might seem useful for assessing national savings conditions, but its use to account for real savings conditions is generally misleading. 

First, as a derived indicator—not a strict accounting identity—it suffers from definitional inconsistency. 

For instance, the World Bank reports it at 9.3% in 2024, while Trading Economics, citing the same source, shows 29.24%. Same source, vastly different realities. (Figure 2, lowest window) 

Second, it is calculated as: 

GDS = GDP – Total Consumption (private + public). 

But GDP itself is indifferent to distributional nuances. As we always ask here: Cui bono or Who benefits? 

Is the savings outcome driven primarily by genuine productivity gains—or by increasing dependence on leverage? What is the quality of the growth? What ratios of cost, allocation, and extraction were involved? 

Third, the GDS measure masks household savings weakness—especially during capital flight or high profit repatriation. 

Fourth, how are these "savings" reflected in the banking system? 

Even when elevated GDS suggests high aggregate capacity, the reality is that available savings for productive intermediation—such as long-term deposits and investible capital—are scarce. CMEPA threatens to worsen this distortion by tilting incentives toward consumption and speculation. 

Put differently: while 2024 GDS appears deceptively high at over 29% of GDP, net national savings—after accounting for income and transfer leakages—is a mere 9.3%, per World Bank estimates. 

This reveals a deep structural fragility in the country's true capacity to accumulate capital. By penalizing savings and redirecting flows into speculative capital markets, CMEPA threatens to widen this gap and exacerbate the very vulnerabilities it claims to address.

Figure 3

Yet—and this is key—BusinessWorld recently produced a chart based on Philippine Statistics Authority (PSA) data showing the second widest gap between saving rates (apparently from the World Bank) and investment rates —which we discussed last March. (Figure 3, topmost visual) 

If savings were truly robust, why does this gap persist? What finances this chasm? 

V. Financing the ‘Twin Deficits’ with Record Systemic Leverage 

Cherry-picking numbers to defend the law ignores that the savings-investment gap has been manifested through ‘twin deficits’—fiscal and external trade. Despite supposed normalization post-pandemic, the Philippine economy remains at pandemic-level dependency on credit. (Figure 3, middle graph) 

Here’s the key: public spending is part of those investment rates. 

Bureau of the Treasury data revealed that the 2025 first-half fiscal deficit hit a record Php 765.49 billion—even without a recession! This confirms earlier warnings, which we’ll expand on in another post. (Figure 3, lowest diagram) 

So, who finances this? Domestic banks and foreign lenders are now absorbing this growing imbalance. 

As previously noted: 

"A shrinking domestic savings pool limits capital accumulation, increases dependence on external financing, and exposes the economy to risks such as debt distress and currency fluctuations."— Prudent Investor, March 2025

Figure 4

As of May, public debt hit a record Php 16.918 trillion, with June data expected to breach Php 17 trillion —the all-time high deficit will accelerate its increase. Didn’t the administration hint at pushing up the debt-to-GDP corridor from 60% to 70%? (Figure 4, upper graph) 

Meanwhile, combined with total bank credit expansion, systemic leverage reached a new record of Php 31.225 trillion, or 118% of 2024 nominal GDP. (Figure 4, lower chart) 

And that figure excludes: 

• Capital market debt issuance (corporate bonds, CMBS)
• FDI-linked intercompany loans
• Informal debt (pawnshops, personal lending, unregulated finance)

Think of the costs: this credit buildup means rising debt servicing burdens, declining real incomes, and growing risks of delinquencies and defaults. 

More importantly, in the absence of productivity-led savings growth, the Philippine economy is running on borrowed money—and borrowed time.

VI. State-Driven Financial Repression: Time Deposits vs. RTBs & Pag-IBIG MP2 

Defenders of CMEPA point to alternatives like RTBs or Pag-IBIG’s MP2 as substitutes for taxed time deposits. 

But these are neither comprehensive nor scalable: 

MP2 has annual ceilings and requires Pag-IBIG membership. 

RTBs are state-managed, episodic, and offer limited liquidity.

Figure 5 

Latest BSP data: (Figure/Table 5) 

• Total time deposits in the PH banking system: Over Php 5 trillion
• Long-term deposits (>5 years): ~Php 500–Php 700 billion
• RTB retail uptake: ~Php 175 billion
• MP2 inflows: ~Php 30–Php 50 billion/year 

Combined, RTBs + MP2 absorb just 5–10% of the capital displaced by CMEPA’s flattening of tax incentives. The rest sits idle, chases risk, or exits the formal system. 

More critically, these instruments are not substitutes for a diverse, open savings ecosystem. They represent state-controlled pipelines—a form of financial repression where household capital is diverted into funding public consumption, and paid for by the diminishing purchasing power of the peso. And this is supposed to ‘encourage’ savings growth? Really?

This contradicts the narrative that these flows remain as ‘savings outside’ time deposits. On the contrary, it is a narrowing of financial autonomy. 

VII. Inflating Stock Market Bubbles: CMEPA’s Savers Lion’s Den 

As previously discussed, the policy-induced gambling mentality has migrated to the equity markets. Instead of encouraging true savings, CMEPA will foster boom-bust cycles that further erode wealth and fuel capital consumption. 

This week’s coordinated pre-closing and afternoon pumps illustrate how institution-dominated markets manage the main index for optics—what we might call "benchmark-ism." (Figure 5, lower graph)

Though it escapes the Overton Window, this behavior—like CMEPA—distorts the price signal function of capital markets, leading to the misallocation of capital goods in the economy. 

By stoking gambling instincts, markets become casinos where savings and credit—someone else’s savings or bank-issued liquidity—is converted into house profits. 

When capital markets are manipulated for non-market goals, the effect is the same: momentum cloaking a wealth transfer. 

CMEPA leads savers straight into the lion’s den. 

VIII. Conclusion: Sovereignty over Speculation, Economic Blowback 

In an age where reform rewards liquidity and penalizes patience, true saving becomes a philosophical—and revolutionary—act. It’s no longer just economic prudence. It’s resistance to engineered ephemerality. 

The ideology driving CMEPA whispers: Be fast. Be fluid. Be speculative. Be extravagant. Be taxable. Be subservient to the state. 

The public must reply: Be steady. Be real. Be cautious. And above all—be sovereign. 

This is not academic critique—it’s a warning. When incentives distort prudence, the fallout is material, not theoretical. 

CMEPA does not act alone. It fuses with a wider architecture of distortion:

• BSP’s redistributionist easing cycle
• Record deficit spending
• An implicit USDPHP soft peg
• Accelerating bureaucratization and economic centralization 

Together, they form the scaffolding of financial and social maladjustment. 

And when crises surface—households hemorrhaging stability, banks scrambling for duration, systems unraveling under engineered fragility—the reckoning will be felt everywhere. 

In that moment, accountability will matter. 

We must remember: Who authored this distortion? Who rationalized it as progress? 

And we must prepare—for its backlash. 

___

References

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