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

 

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

In this issue 

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

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

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

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

IV. Gold as Signal of Systemic Stress

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

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

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

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

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

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

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

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

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

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

Figure 1 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Figure 2

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

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

In 2016, we wrote, 

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

That’s a bullseye!

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

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

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

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

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

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

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

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

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

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

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

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

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

IV. Gold as Signal of Systemic Stress 

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

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

Figure 3 

Today, that reflexive relationship remains in play. 

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

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

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

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

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

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

Paradoxically, Hungary is part of EU and NATO. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Figure 4

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

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

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

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

Figure 5 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Figure 6

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

____

References 

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

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

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

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

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

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

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

Why US Elections Highlights a Decisive Turning Point in the Era of Inflationism

In this issue

Why US Elections Highlights a Decisive Turning Point in the Era of Inflationism

-Inflationism’s Major Roles: Bubble Blowing, Increased Social Conflicts and Heightened Risks of War

-Inflationism’s Role in the Destruction of Social Fiber

-Inflationism’s Role in Global Conflict

-US Elections: Political Turmoil as Post-Election Legacy?

___ 

Decisive history has been unfolding here and abroad.

In the Philippines, the effects of record asset bubbles have spread to the socio-political dimensions.

First, record asset bubbles.

Nominal housing prices have surged past 1997 highs.

Despite the PSE’s whitewashing, stock market valuations have equally soared past 1997 levels this year. Several market internals has vaulted beyond the April 2015 highs even when the Phisix has failed to breach the said levels.

Despite rising government’s measure of CPI and the faltering peso, yields of Philippine 10 year sovereign fell to record lows post-election last July. Or differently put, Philippine 10 year treasury prices soared to a record high!

Next, socio-economic impact of bubbles.

Near record stocks in July, which has failed to reach April 2015 landmark, have surged out of increasingly brazen accounts of market manipulations.

The Philippine government represented by the BSP and the PSA, as well as, the PSE and several listed firms have resorted to massaging of economic and financial statistics intended to exhibit G-R-O-W-T-H and to camouflage deterioration in the real economy.

Not only market manipulations in stock markets, manipulations and fraud have surfaced in the DBP’s whitewashing of bond market losses and the involvement of several officials of RCBC in a cyber heist.

Fraud, manipulations and swindle emerge during the later stages of a bubble

Third, bubbles have spread to politics.

This massive embrace of short term thinking has diffused into Philippine politics where the election of a strong man has now been perceived as a Holy Grail to socio economic ills.

Such populist delusions have been anchored on a strong man rule based on the substitution of legal and institutional recourse with that of violence and the repression of property rights.

Since all actions have consequences, actions that deal with short solutions will come with nasty and wretched longer term effects. The problem is, the day of reckoning has arrived.

Yet unfolding events in the Philippines represents just a symptom of the dynamics occurring abroad.

Inflationism’s Major Roles: Bubble Blowing, Increased Social Conflicts and Heightened Risks of War

Breakthrough history can be seen on how global central bank’s full adaption of inflationism has spawned not only asset bubbles but likewise have been inciting increasing societal strains

The IMF declares record debt household, corporate and global debt to the tune of $152 trillion or 225% of the global economy.

This has been supported by record explosion of central bank’s balance sheets (Yardeni.com November 4), as well as record streak of interest rates cuts which now exceeds 666, as of August, notes the Bank of America, since 2008 (Business Insider August 6). And central banks have moved out of Zero Interest Rates Policy (ZIRP) to deploy negative interest rates (NIRP). NIRP has been implemented by several countries led by Japan, Scandinavian and EU economies. The effect of which has been to spawn unprecedented negative yielding government bonds which has soared to $12-13 trillion (Bloomberg October 3) or about a third of total outstanding bonds (quartz July 2016)!

And because NIRP creates leakages through increased holdings of cash, many have called for an outright ban on the use of cash or eliminate high denomination notes.

Because record debt means borrowed money has to go or used somewhere, such has led to global asset bubbles.

Because part of the easing policies by central banks included bond purchases, negative yielding bonds means bond prices have soared to record highs! And bond prices have been accompanied by record pileup in bond ETFs! From the Financial Times (October 10, 2016): “Investors have piled more than $100bn into bond exchange traded funds so far this year, taking the global total to its highest ever level as fixed income investors adapt to a changing financial ecosystem”.

The IMF’s gauge of housing prices has almost reached 2008 highs! And this again has been backed by ballooning housing debt!

 

Record debt has also fueled stock market bubbles.

And because of the imbalances in relative levels of interest rates created arbitrage opportunities, along with BREXIT, US stock and bond markets rocketed to new records last July. From the Financial Times (July 11): A fundamental relationship between bonds and equities has broken down as the pressure for returns intensifies in an ever-expanding world of negative interest rates. An insatiable thirst for income has driven both US bond yields and equity prices — two areas that traditionally move in opposite directions — into record territory.

This occurred even when the index of global stocks (FAW) failed to correspond with the US which runs in contrast to 2014 and 2015.

Such curious developments have transpired even when the global economy as measured by World Bank’s GDP has been trending significantly lower since 2010!

The unequal distribution of economic gains has sown seeds to social conflicts.

Inflationism’s Role in the Destruction of Social Fiber

And because borrowed money hasn’t only been inflating bubbles which have apparently become dissonant with global economic performance, these have also been used to finance public expenditures, such as the welfare and the warfare state.

Based on OECD’s measure for member countries, social spending as % of GDP soared to 2009 record highs in 2016!

In other words, as economic conditions slowed, more people have become dependent on government’s largesse to sustain them. And with insufficient revenues, such government bounties have been funded by expansive debt.

And because of bigger funding requirements, governments intrusions on the economy has vastly increased—as evidenced by surges in regulations or mandates and by taxes (indirect and direct).

The intensifying politicization of domestic economies across the world, in the face of immensely burgeoning of dependency on the government, has prompted for a deepening polarization of society.

This comes as global bubbles amplify redistribution process favoring the financial and speculator class.

Don’t forget bubbles have varying effects on the populace. For instance, property bubbles impact society unevenly. Property bubbles subsidizes property speculators, but harms businesses through reduced profits via higher operating costs through increased rents and or higher property costs for acquisitions especially funded by debt or via reduced cash flows. It also impacts households through reduced affordability for potential or would be buyers homeowners, as well as, diminish the disposable incomes for renters.

A wonderful example: In the US, while economic conditions (meager jobs and wage growth) have been cited as main reason why more young adults are living with their parents –for the first time in 130 years (NPR, Pew Research May 24, 2016)—asset inflation or property bubbles may have likely been an important contributor to such dynamic. This has been happening as homeownership has slumped to the lowest level in more than 50 years (Bloomberg July 28) while rental markets skyrocketed (CNBC June 16). [As a side note, perhaps as signs of hissing bubbles, some major rental markets in August have started to drop. Wolf Street,September 2]

Also in the past [How Inflationism Spurred Singapore’s Labor Protectionism September 24, 2013] I have shown how Singapore’s property bubbles have sparked an outcry by residents against foreigners. This has led the government to impose labor protectionism or added restrictions on foreign hiring in the hope to reduce demand for housing.

So for the politically dependent class and for many other aggrieved segments of society, the unevenness of (the unseen politically, or to be more specific, mainly central bank induced) economic distribution has been seen as “inequality” brought about by “market forces”, hence, the aggravation of partisan politics predicated on immediate gratification or short-termism as evidence by the accession of a mélange of anti-immigration, nationalism, protectionism and anti-globalization forces, as well as, growing secession movements.

Scotland’s failed independence referendum in 2014 served as a precursor to the successful Brexit (UK’s withdrawal from the EU) referendum in 2016. The arguments for Brexit centered on immigration controls, rejection of EU bureaucrats and interests of the establishment, as well as reduced intervention on UK’s economy (Marketwatch June 23). PM Theresa May chastised the Bank of England for sowing inequality early October (Business Insider October 5). Unfortunately, Brexit hit a wall when UK’s Supreme Court ruled that invoking Article 50 required a vote by the Parliamentary. The government has appealed to reverse on this ruling. (Bloomberg November 4, 2016)

Italy’s government has been slated to hold a supposedly crucial referendum on “constitutional reform” in December 4. The referendum could represent a litmus test on the likelihood of Italy’s exit from the EU. And Italy has been experiencing a deluge of money outflows, partly due to the banking system’s problem, and perhaps partly, through increased risks of an “Italexit” (Bloomberg, October 17)

Inflationism’s Role in Global Conflict

And since the world operates in sheer complexity, years of central bank inflationism has also spillover to promote global conflict through the financing of the warfare state.

While global military spending expanded materially from 1991-2010, it has been static over the past few years. However, even while the aggregate numbers have been stable since 2011-2015, the distribution of global military spending has vastly differed. The biggest growth in the arms race in 2006-2015, according to the Stockholm International Peace Research Institute (SIPRI, April 2016) have been the UAE 136%, China 132%, Saudi Arabia 97%, Russia 91%, India 43%Brazil 38% and South Korea 37%.

Though expenditures fell 3.9% over the same period, US military spending accounted for 44% of the $1.35 trillion spent by the top 15 or 35% of the total world arms spending at US $1.676 trillion. US military spending accounted for 16% of 2015 budget (Heritage Foundation) and is bound to rise to $617 billion in 2017 according to USgovernmentspending.com

In short, relative growth comparisons would seem inadequate simply because of the scale of spending involved. All other nations have come from small reference numbers.

Yet, the US doesn’t spend all that humongous amount of money for nothing. Hence they have been meddling everywhere.

Former US president Dwight Eisenhower was right, in his 1961 speech he warned against the expansive influence through the domestic political and geopolitical clout of the military industrial complex: “we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist”.

Today, the military industrial complex combined with the neoconservative’s embrace of the Wolfowitz Doctrine (Wikipedia) “suppress potential threats from other nations and prevent any other nation from rising to superpower status” has led to manifold US intrusions in overseas affairs and “encirclement strategies” against perceived competitors for superpower status.

Hence, this has prompted governments like China and Russia to respond with an arms race.

The US government’s interference in the Middle East affairs, in particular Syria and in Eastern Europe (Ukraine) has brought her face to face with nuclear power Russia. The US appears to be fighting a proxy war for Israel, since the Syrian leadership has been an ally of Iran and Syria supported Palestine resistance against Israel. The US government has been further involved in Libya, Yemen and, Iraq where the US seems also fighting a proxy war for Saudi Arabia [New York Times March 13, 2016].

This shows how world is faced by real risks of a nuclear confrontation between nuclear powers.

A week ago, the CNN (October 28) reported that a US and Russian war plane, “flew dangerously close to each other while flying over Syria earlier this month”.

Any possible real encounter could translate to “one thing leads to another”.

Add into this combustible cauldron are South China Sea territorial disputes, and rogue North Korea. And another potential flashpoint should include the Kashmir region (India versus Pakistan versus China) [James Hardy Asia Pacific editor of the IHS Janes Defence weekly The National Interest October 17, 2014].

Such debt financed massive arms race increases the risks of a world at war—especially once the global economy falters or a financial crisis emerge. Governments are likely to look for external bogeymen to blame their internal woes.

And wars in the Middle East have led to massive refugee flows into Europe as well. And such massive refugee flows has led to a refugee crisis that has fueled the growing anti-migration/nationalist sentiment.

In other words, trickle down central bank policies based on war on interest rates have spawned multiple social problems not limited to the economic and financial sphere.

US Elections: Political Turmoil as Post-Election Legacy?

This leads us to next week’s crucial US presidential elections.

Despite being the most unfavorable candidates today, the two major candidates appear to be products of Fed sponsored inflationism

Intense partisan politics has reduced the present election into a sham. With both proposing to solve current dilemma by focusing on short term solutions through increasing interventionism and expansive the government, there seems hardly a distinction between them. Nevertheless, the election has been projected as representing a competition between the establishment and the anti-establishment—a theme which resonates with the geopolitical milieu.

Regardless of the winner next week, the vitriol from the election campaign will likely be a legacy.

For one, investigations over the scandals that have wracked the administration’s bet will unlikely diminish.

Question is why has the FBI suddenly U-turned to reopen its investigation on the email scandals that has plagued the administration’s bet at culmination of the campaign period? Has there been a fracturing in the relationship among the establishment interests or the unelected “deep state”, for them to have abandoned the administration’s bet?

Has part of the establishment or the unelected deep state been worried that further investigations post-elections would expose them and cause prospective indictments? Will the sustained investigations, most likely to be conducted by the lower house if controlled by the rival but incumbent (Republican) party, lead to an impeachment, if the administration’s presidential bet wins?

If so, how will the administration’s bet respond to them, will she divert the public’s attention by forcing an armed confrontation with Russia and or China?

Moreover, given the unfathomable wedge that has driven many of the populace towards the populist rival, would a perceive winning by administration’s bet be calmly accepted?

Electoral violence looms especially if ballot rigging will be perceived as the cause of the underdog candidate’s loss (The Guardian November 5). Will there be civil unrest if the populist bet loses?

And what happens if the underdog anti-establishment bet wins? Will the winner eventually end up like the fate of John F. Kennedy?

Additionally, will the election of the populist leader actually lead to imposition of protectionist trade and migrant walls?

And again, regardless of next week’s winner, the imbalances from inflationism will eventually take its toll…perhaps sooner than later.

Just how will next week’s winner respond to this? Will there be more bailouts? And how will the public perceive of the leadership during the coming downturn? Will the present divide lead to a smoldering of umbrage and indignation? Will there be civil unrest?

Yet it has been pretty much a fascination to see how recent performance in the stock markets has been attributed by media to the perception of the odds of winning by the contenders for the US presidency.

When markets go up, it has been said that administration’s bet has the perceived edge. And when the markets go down this has been imputed to growing chances by the underdog. So far, the US and global markets appear to be teetering at the precipice (see FAW above).

In the case of Brexit, polls were mostly skewed towards establishment interests (Bremain) only to see an opposite outcome. At present, polls and establishment media has largely been projecting a win by administration’s protégé.  Will next week be a reprise of Brexit which may cause revulsion in the financial markets? Or will next week send a massive short covering? 

As said above, like the Philippines, persistent inflationism has only spawned societal disharmony and the risks of discord

Even in the US, decisive history is in the making.