Stagflation Part 17: Eight Months of Twin Deficits, Record Debt, and the Bill for Deferred Adjustment

 

The financial history of the last century shows a steady increase in the amount of public indebtedness. Nobody believes that the states will eternally drag the burden of these interest payments. It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract– Ludwig von Mises  

In this issue:

Stagflation Part 17: Eight Months of Twin Deficits, Record Debt, and the Bill for Deferred Adjustment

I. Introduction: The Path, Not the Print

II. The Fiscal Leg: Php 1.054 Trillion of Deficit, Php 756 Billion of Amortization

III. The Debt Leg: Php 19.61 Trillion and the Peso's Hand in It

IV. Stein's Law and the Two Exits

V. The Trade Leg: Record Exports, Record Imports, Record Gap

VI. Borrowed Stability, Again: August BOP, GIR, and the July Remittance Bounce

VII. Interventions Beget Interventions: The Fare, Wage, and Excise Cascade

VIII. The Global Vise: Bond Vigilantes, Whac-a-Mole Reserves, and a Thinning Treasury Market

IX. The Malinvestment Footprint: The Master Builder's Hotels

X. Conclusion: The Bill Has Arrived

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Stagflation Part 17: Eight Months of Twin Deficits, Record Debt, and the Bill for Deferred Adjustment 

Php 19.61 trillion of debt, Php 1.9 trillion added in eight months, and the free-lunch politics of price suppression, transfers, and debt finally moving through the balance sheet

I. Introduction: The Path, Not the Print 

Eight months into 2026, the same message keeps appearing on different balance sheets. The adjustment did not disappear. It migrated. 

• The National Government's January–August deficit reached Php 1.054 trillion, up 21.3% from a year earlier and above the pandemic-year 2021 mark for the same stretch, which was just underPhp 1 trillion.
• National Government debt reached a recordPhp 19.61 trillion, withPhp 1.899 trillion added since December.
• The merchandise trade deficit reached $41.56 billion, up 26.3%, with exports and imports both at record year-to-date levels. 

Our Stagflation Part 13 identified the twin deficits. This installment shows the accelerating migration into the sovereign balance sheet, the currency, prices, wages, and the bond market. 

A word on how to read these numbers. This series does not treat official statistics as accurate to the decimal, nor does it litigate their underlying meaning. It does not need to. 

Rather, a process shows in direction, persistence, and the pattern across ledgers, not in whether a figure lands within a rounding error of a forecast. August's blowout is not a surprise to be explained. It is one more step along a path. 

That path was described in our August 2025 piece: "June 2025: A Countdown to Fiscal Shock." The driver was never the oil shock, the pandemic, or any single budget line. It has been the FREE LUNCH POLITICS embedded in Philippine democracy: 

These systems don't just elect leaders—they ratify an ethos: that deficit-fueled expansion is not only moral but inevitable. Redistribution becomes ritual. The annual SONA pipelines new spending schemes, boosting short-term political capital—but the structural anchors are threadbare. Compassion without discipline sedates policy. Time preferences spiral, gravitating toward the instant dopamine hit of political dispensation… 

When such convictions are deeply embedded, a disorderly reckoning is inevitable. 

The 2026 data are that ethos on a bigger stage, and running on a faster clock. The pandemic-era rate and reserve-requirement cuts, the doubling of deposit insurance, and the quiet USDPHP cap intensified the savings-investment gap. 

Today’s EO 110's price suppression, balance-sheet transfers, BSP relief measures, three consecutive timid rate hikes, and an exchange-rate regime the BSP declines to name are accelerating it. Each layer was sold as temporary. 

The deferred cost is what the August data are made of. 

II. The Fiscal Leg: Php 1.054 Trillion of Deficit, Php 756 Billion of Amortization 

Figure 1 

August's deficit was ₱161.3 billion, 90.2% above a year earlier. [Figure 1, upper image] 

The Treasury's explanation: Php 58.6 billion went to settle PhilHealth's arrears, and local governments received larger tax shares. 

Take PhilHealth out and August is still Php 102.7 billion, 21% wider than a year ago. That is the same pace as the eight-month total. The "one-off" did not create the trend. It joined it. An arrears payment is spending that was owed earlier: deferred adjustment arriving on schedule. 

In the eight months of 2026, revenue grew 4.3% to Php 3.22 trillion. Spending grew 8% toPhp 4.27 trillion. Spending is outrunning revenue at nearly twice the speed. 

But the deficit is only the first line of the bill. It does not include amortization. The Treasury's debt service report does. [Figure 1, lower table] 

Total debt service is 1.4 times the deficit and equals roughly 45% of everything the government collected. Interest alone takes about 21% of revenue. The Php 756 billion of principal, Php 631 billion of it—domestic and concentrated in February and April—is not paid from revenue. It is rolled: new borrowing retires old borrowing. Add it to the deficit and the year-to-date gross financing need approaches Php 1.8 trillion.

Figure 2 

In fairness to the data, August itself was a light month for debt service: Php 76.1 billion, the lowest of the year, with amortization at only Php 10.5 billion. The August deficit widened on spending, not on debt service. That makes the YTD picture worse, not better. The heavy rollover months have already passed, and the deficit is still 21% wider. 

YTD debt servicing—interest plus amortization—was lower from last year, but third highest on record. [Figure 2, topmost diagram] 

Now the targets. The 2026 deficit program was ₱1.61 trillion when the year began. It is Php 1.658 trillion now. When the debt ratio reached 62% in 2025, the benchmark was moved to 70%. A ceiling that moves up whenever it is touched is a forecast, not a ceiling. 

The eight-month deficit already equals 64% of the program. Staying inside it requires Php 151 billion a month for the last four months, against a year-to-date average of Php 132 billion. 

Last year's final four months came to Php 708 billion, in a year when the flood-control probe was throttling disbursements. Repeat only that, and 2026 closes near Php 1.77 trillion, about Php 103 billion over program. That is arithmetic, not a forecast. 

III. The Debt Leg: Php 19.61 Trillion and the Peso's Hand in It 

Debt rose Php 217.62 billion in August to ₱19.61 trillion, 12.2% above a year ago and 10.7% above December. The milestone is not that debt is high. It is that nearly Php 1.9 trillion of fresh claims on future income piled up in eight months. 

At Php 1.899 trillion, the January–August increase is the largest eight-month increase in the available series, edging above the Php 1.88 trillion increase recorded during the pandemic period. [Figure 2, middle graph] 

Notice what else the numbers say. Debt grew Php 1.899 trillion. The deficit was Php 1.054 trillion. The Php 845 billion difference comes from valuation and from cash the Treasury borrowed ahead of need, in proportions the Treasury's financing report would show. The stock of claims is growing much faster than the deficit that officially explains it. 

The currency is part of that gap. The Treasury valued external debt at 62.209 pesos per dollar in August, against 61.327 in July and 57.042 a year ago. A 1.4% depreciation applied to the roughly Php 6.28 trillion July external-debt stock implies a peso-translation effect of about Php 90 billion. The external stock actually rose Php 87.25 billion, while total NG debt rose Php 217.62 billion. On this simple calculation, the exchange-rate effect alone is equivalent to roughly 41% of August's total increase in NG debt. This treats the external stock as dollar-denominated and holds its foreign-currency amount constant; it is an approximation, not a Treasury decomposition. 

The exposure has hardly been ever static. External debt accounted for 32.47% of outstanding NG debt in August, and its share has been rising from its March 2021 low. [Figure 2, lowest chart] 

As fiscal pressure raises financing requirements, the peso comes under pressure; depreciation then raises the peso value of foreign-currency debt, feeding back into the fiscal burden. 

A weaker peso does double duty: it raises the peso price of imports and the peso value of foreign-currency liabilities. Our Stagflation Part 16's peso discussion feeds directly into this one. The FX problem and the fiscal problem are one problem. 

Two ideas from Carmen Reinhart and Kenneth Rogoff's study of eight centuries of sovereign debt help explain why the ratio alone is not the number to watch. 

The first is debt intolerance. A government's ability to carry debt depends not only on the current debt-to-GDP ratio but also on its repayment history, inflation history, institutional credibility, and access to financing. Countries with histories of default or monetary instability can encounter financing constraints at debt levels that would be manageable for countries with stronger records. Creditors price the stock of debt, but they also price the history behind it. 

The Philippines has a 1983 debt crisis in that history. A debt-to-GDP ratio approaching two-thirds, with a benchmark moved upward once the ratio touched it, is therefore not just an exercise in comparing one ratio with another country's. It is a question of how much confidence the sovereign can command as the stock keeps rising. 

The second is financial repression. A government that will not sufficiently reduce its deficit can lower its effective financing burden by keeping real interest rates low and creating institutional demand for government paper. The cost does not disappear. It is transferred, often quietly, to savers and financial institutions. 

The pieces are in view. Banks' net claims on the central government were ₱6.24 trillion, about a fifth of their assets, in June. 

Last August, the policy rate was 5.0% against 6.1% inflation, a negative real rate of 1.1 percentage points. 

Against the regulatory and institutional machinery documented throughout this series—portfolio constraints, directed liquidity, reserve and capital rules, and the policy measures that have progressively enlarged the banking system's exposure to the sovereign—this is not merely a low-rate environment. It is financial repression: the cost of financing the state is being shifted onto savers and financial institutions while the sovereign balance sheet continues to expand. 

IV. Stein's Law and the Two Exits 

Herbert Stein's law says that if something cannot go on forever, it will stop. It says that unsustainable dynamics will not last—but says nothing about the timing or the manner. In this case, the political economy decides both. 

Essentially, a deficit that grows faster than the revenue available to service it cannot continue indefinitely. It can stop in two ways. 

• The voluntary exit is a political system choosing to spend less or tax more.
• The involuntary exit is creditors declining to roll the debt at the old price. 

That is the sudden stop: a confidence crisis in which creditors cease to believe that the existing financing path can continue on the old terms. Refinancing suddenly becomes scarce or prohibitively expensive. The adjustment then arrives through some combination of higher yields, capital outflows, currency depreciation, reserve losses, and forced fiscal contraction. The market does not need to refuse every peso. It only needs enough creditors to withdraw or demand a materially higher price for the financing chain to break. 

Our 2025 fiscal shock argument was that the voluntary exit is politically closed, because the system rewards the opposite: voters are offered benefits and billed later. This year's SONA offered more of the same: a higher income-tax threshold, implying about ₱66 billion in forgone revenue, and the removal of system-loss charges. Every proposal moves cost into the future. A political system built that way does not stop itself. 

That leaves the second exit, and the second exit has a door: the Php 756 billion of amortization, and counting. Every maturity has to be refinanced, repaid from available cash, or otherwise absorbed by the balance sheet. So far, the creditors have rolled, with BSP relief measures, held-to-maturity accounting, and banks' captive appetite making the rolling easier. That is why the fiscal story and the bond-market story in Section VIII are one story. 

Stein's Law does not tell us the date. It tells us the constraint: a debt crisis is what happens when an unsustainable political process finally meets an arithmetic constraint it cannot repeal. 

V. The Trade Leg: Record Exports, Record Imports, Record Gap 

The August export headline was spectacular. Exports hit an all-time monthly high of $9.11 billion, up 27.8%. The trade deficit narrowed to $3.85 billion, the smallest in 15 months. 

Figure 3 

Read the same release for what it also says. Over eight months, exports are up 14.8% to $64.04 billion. Imports are up 19.1% to $105.6 billion. The deficit is $41.56 billion. [Figure 3, topmost image] 

The DBCC's full-year assumption was exports +3% and imports +5%, so the planning numbers were off by a factor of roughly four in both directions. 

Exports are production and services sold abroad. The trade deficit is the excess of imports over exports, and it must be financed by other foreign-exchange income or foreign capital. That is why the celebratory export headline is only half the story. The other half is the financing requirement. 

The composition matters too. Electronics comprised 68.1% of August's exports, semiconductors alone 57.6%.  Chip exports surged 73.5%. [Figure 3, middle window] 

The surge is occurring alongside a broader data-center investment boom. In the United States, spending on data-center construction rose 7.5% in August from July and 73% year over year, reaching a seasonally adjusted annual rate of $85 billion, according to Wolf Street—an indication of the infrastructure buildout underpinning the current semiconductor cycle. [Figure 3, lowest diagram] 

A trade balance that improves because one export category keeps gaining share is not, by itself, evidence of broad-based adjustment. It increases the economy's exposure to the investment cycle driving that category—in this case, the global semiconductor and AI buildout.

If that investment cycle weakens—perhaps partly because of rising global rates, and partly because of potential excess capacity—the export engine weakens with it. 

The global capital-spending cycle becomes part of the Philippine balance sheet. 

The fiscal gap and the trade gap are one fact told in two currencies. The government spends more than it collects. The economy absorbs more tradable goods than it sells abroad. The difference has to be financed. 

Someone had to lend. Debt can finance spending. Foreign capital can finance imports. Remittances can finance consumption. Credit can postpone adjustment. None of them creates the productive capital that makes the structure self-sustaining. 

Carl Menger's point was that production rests on complementary goods and resources arranged through time. Machines, materials, skills, and savings must exist before the output does. A financial claim is not one of those goods. 

You cannot borrow your way around scarcity. 

VI. Borrowed Stability, Again: August BOP, GIR, and the July Remittance Bounce 

The Philippines still has genuine buffers. But cushions are not cures. Part 13 showed that June's BOP surplus ($3.4 billion) and the GIR's bounce to $104.74 billion were borrowed: a $2.5 billion eurobond and a $1 billion World Bank package. Borrowed stability has a half-life. 

August's BOP was a $596 million deficit, against a $359 million surplus a year earlier. The eight-month deficit is $5.94 billion, up 10.11%. The GIR is $104.8 billion, almost exactly where June's borrowed reading left it, 5.4% below end-2025 and 7.5% below February's $113.3 billion peak. 

How do reserves rise in a month when the BOP is negative? 

The BOP counts transactions. The GIR also counts revaluation. The BSP attributes the $1.5 billion rise to gold revaluation and income on foreign investments, partly offset by national government drawdowns of FX deposits for debt service. Gold holdings rose $1.62 billion, more than the entire gain. 

Figure 4 

Foreign-currency securities fell $3.11 billion. Other reserve assets (ORA), the repo-and-derivatives bucket, rose $3.352 billion to $15.48 billion, or 14.8% of August GIR. The BSP does not say what moved that bucket. [Figure 4, upper graph] 

The pattern (securities down, other reserve assets up, peso at records on suppressed volatility) is what intervention through derivative and repo positions would look like. 

Despite the BSP's public characterization of its intervention as selective and aimed at smoothing volatility rather than defending a particular level, the reserve changes—and the intervention evidence traced in Part 16—point to a much larger role for intervention than the official description suggests. The issue is not whether the BSP intervenes. It does. The issue is the extent of interventions. 

Meanwhile, July cash remittances rose 1.9% to $3.24 billion, up 6.6% from June, with school-opening seasonality doing part of the lifting. In dollars, the currency that pays for the import bill, growth is about 2%. In pesos it is roughly 10%, because the peso lost about 9% over the year. However, despite the monthly growth, cumulative remittance growth continues to slow—since peaking in 2014. [Figure 4, lower chart] 

The same depreciation that gives remittance households more pesos per dollar also raises the peso value of the government's dollar liabilities. In Section III, that translation effect was roughly Php 90 billion on the external debt stock. One peso, two ledgers. 

The crux of the matter is whether the economy generates foreign exchange fast enough to support its growing claims on it. The trade gap says those claims are growing faster. 

VII. Interventions Beget Interventions: The Fare, Wage, and Excise Cascade 

Look at the calendar. 

• Sept 25: EO 125 suspends the excise on LPG and kerosene, the second suspension this year:Php 3.36 per kilo of LPG (aboutPhp 37 per 11-kilo tank) and Php 5.60 per liter of kerosene, for three months or until the monthly Dubai average falls below $80.
• Sept 26: Wage Order NCR-28 takes effect: Php 60 on a Php 695 floor (+8.6%).
• Sept 28: the fare hike takes effect after six months of administered delay.
• Oct 14: Central Visayas follows with Php 42, 7.8% to 8.4%. 

Four interventions in 19 days. And these are just the significant ones. 

That is the sequence a price control produces. EO 110 suppressed fares. Operators responded by cutting trips as costs outran revenues. Eventually fares had to rise. The fare hike is a partial repeal: the market getting its price back. 

Let there be no mistake: this is a revelation that price controls eventually fail. 

They can suppress a price, but they cannot suppress the scarcity, cost, or resource constraint that produced it. The adjustment therefore migrates elsewhere—into supply, quality, queues, producer margins, fiscal transfers, or eventually the price itself. 

And yet, almost simultaneously, the next offsetting interventions landed. 

Ludwig von Mises called this the interventionist spiral: each intervention fails on its own terms, and the failure becomes the case for the next one. Suppress one price, and distortion accumulates. Another price adjusts. Policymakers intervene again. But as the maladjustments spread, the intervention dragnet widens. Each intervention pushes another cost onto consumers, producers, taxpayers, or the government's balance sheet—a vicious feedback loop. 

This is what I call Whac-a-mole economics: suppress one manifestation of the imbalance and it reappears somewhere else. 

The recurring architecture of emergency economics is:

    price suppression → fiscal transfer → balance-sheet transfer → debt 

And this is where the deeply ingrained POLITICS of the FREE LUNCH enters. Price controls make the benefit visible now and the cost invisible until later.  The voter sees the cheaper fare, the cheaper LPG tank, or relief from a price increase. The deferred cost lands elsewhere—on the producer’s margin, the taxpayer, the fiscal balance, the banking system, or the next year’s budget. The political reward is immediate. The adjustment bill is somebody else’s future problem. 

Notice how the NCR order was built. The Php 85 raise under NCR-27 was frozen by a Pasig court injunction. The wage board did not wait for the court. It issued NCR-28, carrying the same Php 60, outside the injunction’s reach. Two orders, one raise. When the court said no, the board reissued the yes. 

The seen: Php 37 off an LPG tank, Php 60 more wage a day, a fare that was overdue. 

The unseen is where each cost lands. 

The excise holiday takes revenue from a deficit already 21% wider. The IMF mission chief's own defense of it is that higher VAT receipts on pricier gasoline have offset the loss. That is a rebate on the Treasury's own windfall: the price spike taxed at 12% and a slice returned through LPG. The underlying scarcity remains. The cost simply moves from the pump to the fiscal balance. 

The wage orders land on the part of the economy with the least access to capital. A mandated raise of 8% or more is a cost increase, not a gain in output. It falls hardest on the small enterprises that employ most workers and receive 4.48% of bank credit (Part 15). Employers absorb it first in margins, and where there are no margins, in hiring, hours, and informality. Labor data lag those decisions, which is why July's jump in unemployment (Part 16) is more likely the first reading of this series than the last. 

A wage floor above what output supports is a regulatory tax on capital, and it widens the savings-investment gap from a second direction. 

Every one of these measures was designed to ease a price. None produced a single additional unit of fuel, a single additional bus trip, or a single additional peso of savings. 

The intervention changes who absorbs the scarcity. It does not remove the scarcity. 

VIII. The Global Vise: Bond Vigilantes, Whac-a-Mole Reserves, and a Thinning Treasury Market 

The external environment is becoming less accommodating just as the domestic economy becomes more dependent on financing.

Figure 5 

On October 1, the US 10-year Treasury yield touched 5.34%, its highest since 2002, before closing at 5.24%. It rose almost 90 basis points in the third quarter, the biggest quarterly increase of this century. The UK 30-year touched 6% for the first time since 1998. US gross debt crossed $40 trillion on August 18. When the world's collateral reprices, every sovereign that borrows against it faces a different price of money. [Figure 5, upper window] 

Philippine yields have repriced too. The 10-year BVAL reference rate stood at 7.6182% on September 30, up roughly 154 basis points year to date, although still below its May 20 peak of 7.8094%. That May peak was already above the 7.72% reached on November 10, 2022, during the Russia-Ukraine oil shock. The September close therefore remains around the territory reached during that earlier episode of external stress. 

It would be too simple to call this a mechanical spillover from US rates. Philippine bonds are mostly sensitive to domestic conditions, policy actions and the peso's exchange rate.  The streak of USD/PHP highs has come alongside—and amplified—the pressure on Philippine yields. [Figure 5, lower visual] 

A rising yield says financing is becoming more expensive. 

Figure 6 

Look at what stands beneath it. BVAL is a valuation model that produces reference rates from available quotes and trades, and it is only as good as the trades beneath it. The PDS data show the market thinning as yields rise. September's market volume was Php 613.8 billion, the lowest month of 2026: 37% below August, 63% below January, and 26% below the average month of 2024. On September 25 alone, government-securities turnover fell to Php 13.54 billion from Php 24.19 billion a week earlier. Daily turnover has slumped to 2024 levels. [Figure 6, topmost window] 

On that score, yields are rising while volume is falling. The reference price is being formed in a market that is becoming thinner precisely as the government needs that market to absorb more financing. 

And this is the market that is supposed to absorb the incremental demand associated with JP Morgan index inclusion. 

Inclusion may attract investors. It cannot manufacture liquidity. Markets price risk, not press releases. 

Then there is the outside world's own relief habit. The US Strategic Petroleum Reserve fell to 283.8 million barrels in the week ending September 25, the lowest since October 1982, after a 172-million-barrel release. [Figure 6, middle chart] 

US diesel set a record of $6.53 a gallon on September 22. Crude tanker rates recently hit all-time highs. The Middle East conflict and the Russia-Ukraine war continue to disrupt supply. The BSP raised its 2027 inflation assumption on El Niño risk. Agricultural commodity prices, as noted in Part 16, remain elevated. 

This is Whac-a-mole economics at the global level: suppress one price, draw down a reserve, subsidize another input, borrow against the future. The shock reappears somewhere else. 

The US draws down its strategic reserve to hold today's price down. The Philippines draws on its balance sheet to do the same. Both buy a quieter price now and leave a smaller buffer for the adjustment ahead—even as the war has not ended. 

Nor is oil the only pressure. The record Bloomberg agricultural index discussed in Part 16, together with the potential effects of El Niño, adds another layer of supply risk. 

IX. The Malinvestment Footprint: The Master Builder's Hotels 

The twin deficits are not only financing problems. They leave a footprint in the allocation of real capital. 

Cheap credit, policy incentives, and optimistic demand assumptions push capital toward projects whose economics depend on conditions that may not persist. The Philippine hotel sector is one example. 

The great Ludwig von Mises told the story of a master builder who miscounts his materials: the foundation is too large for the bricks available, and the house cannot be finished. The builder may execute perfectly. The error lies in the signal he built on: the apparent availability of resources that do not, in fact, exist in sufficient quantity. 

That is the mechanism of malinvestment. When financing conditions understate the scarcity of savings and capital, investment can be pulled forward into projects that appear viable at the distorted price of credit but cannot all be completed or profitably sustained once the underlying constraint reasserts itself. 

The Philippine hotel pipeline shows the footprint. Of the 20,509 room keys projected for 2026 delivery, 29% have been canceled and fewer than 6,000 delivered on schedule. Yet the 2026–2032 pipeline has grown to 45,884 keys across 213 projects, with Php 387 billion committed. 

The foundation keeps getting larger. 

Demand tells the other half. Foreign arrivals are up only 0.99% year to date through August, while Bohol's first-half arrivals fell 22%. [Figure 6, lowest chart] 

The divergence matters: capital commitments are expanding far faster than the demand evidence that is supposed to justify them. 

Canceled projects are not merely missing hotel rooms. They are evidence that resources were committed on assumptions that did not survive contact with reality. The capital cannot necessarily be redeployed without loss, delay, or impairment. 

The mistake is rarely visible during the boom. It becomes visible when the financing conditions and demand assumptions that supported the investment change. 

That is the malinvestment footprint of deferred adjustment: the distortion does not remain in the financial system. It eventually appears in the physical structure of the economy. 

X. Conclusion: The Bill Has Arrived 

The Philippine economy is now carrying a

• Php 1.054 trillion fiscal deficit,
• Php 756 billion of principal to refinance or repay,
• $41.56 billion trade deficit, and
• Php 19.61 trillion of national debt that grew Php 1.9 trillion in eight months 

It faces higher global financing costs, an energy shock, currency pressure, and renewed commodity inflation.

The policy response remains the same: suppress the price, subsidize the difference, transfer the balance-sheet damage, borrow, repeat. The process runs: 

deficits → debt → debt service → reduced fiscal space → more intervention → more distortion. 

It does not run in isolation. It interacts with the trade deficit, the peso, imported inflation, interest rates, and private balance sheets. The adjustment moves from one ledger to another. 

The numbers say how little room is left. 

The Php 19 trillion-plus debt level that the DBCC had projected for 2026 has already been breached: national government debt reached Php 19.61 trillion in August. The projection did not survive to year-end; the debt stock crossed it with four months still remaining. 

The deficit program has four months to absorb a final-quarter spending pattern that has run above Php 700 billion. 

Foreign reserves are rising through gold revaluation and leveraged based other reserve assets (ORA) rather than an improvement in the underlying external balance. 

The market that must absorb the issuance trades at a fraction of January's volume. 

Economics eventually sends the bill. 

It appears first in prices. Then wages. Then the currency. Then government debt. Then bond yields. And eventually in investment and growth. 

Every debt cycle has its alibi: this time is different. 

This time it was the oil shock. It wasn't. 

The oil shock was the alibi. The underlying cause was the embedded political structure that made deficit-fueled expansion appear both moral and inevitable. Each intervention postponed the adjustment and made the next intervention necessary. Each postponement moved the cost into another ledger. 

Stein's Law does not negotiate with it. 

The adjustment did not disappear. 

It migrated. 

It migrated from prices to wages, from wages to fares, from fares to fiscal transfers, from fiscal transfers to debt, from debt to the currency and bond market, and from the financial system into the allocation of real capital. 

It is now visible in the sovereign balance sheet itself. 

The bill for deferred adjustment has arrived. 

Batten down the hatches. 

_____

References: 

Last four Stagflation series:

Stagflation Part 16: The Peso's 24th Record Low — When the Pressure Valve Widens, September 13, 2026

Stagflation Part 15: The PSEi 30 1H 2026 Earnings Mirage — Nominal Growth, Record Debt, Real Stagnation, August 30, 2026

Stagflation Part 14: Q2 GDP at 2.3% and Falling — A GDP Built on Suppression and Debt, August 9, 2026

Stagflation Part 13: Record Twin Deficits Signal the Cost of Deferred Adjustment August 2, 2026

 

Supply Side Inflation? A Philippine Congressional Think Tank Warns of Runaway Inflation from Excessive Public Spending!

 

There has never occurred a hyperinflation in history which was not caused by a huge budget deficit of the state. Deficits amounting to 40 per cent or more of expenditures cannot be maintained. The examples of both Germany and Bolivia suggest that at least deficits of about 30 per cent or more of gross domestic product are not maintainable since they imply hyperinflation. In all cases of hyperinflation deficits amounting to more than 20 per cent of public expenditures are present—Peter Bernholz, Monetary Regimes and Inflation 

In this issue 

 

Supply Side Inflation? A Philippine Congressional Think Tank Warns of "Runaway Inflation" from Excessive Public Spending! 

I. Wow! Congressional Think Tank Warned of Runaway Inflation from Excessive Public Spending! 

II. How Public Spending Causes Inflation 

III. The Collateral Function of Public Debt 

IV. From Automatic Stabilizers to Fiscal Dominance  

V. Risks of Excessive Deficit Spending: Debt Crisis and Hyperinflation 

VI. Rising USD Share of Philippine Public Debt: "Rising USD Shorts" 

Supply Side Inflation? A Philippine Congressional Think Tank Warns of "Runaway Inflation" from Excessive Public Spending! 

 

A Congressional think tank has recently warned about "runaway inflation" from excessive public spending. Fiscal policy management from countercyclical to procyclical.  The rising USD "shorts." 

 

I. Wow! Congressional Think Tank Warned of "Runaway Inflation" from Excessive Public Spending!

 

Businessworld, September 28: A HOUSE of Representatives think tank has warned of runaway inflation if the government of President Ferdinand R. Marcos, Jr. fails to rein in spending. “Given the present level of inflation and the inflationary pressure accumulated in the past three years, the risks associated with maintaining a high public spending strategy are not insignificant and, perhaps more importantly, growing over time,” the Congressional Policy and Budget Research Department (CPBRD) said in a report this month. (bold added) 

 

Has the mainstream begun to admit to the inflationary repercussions of credit-financed deficit spending?   

 

Is the mainstream's narrative of supply-side "transitory" inflation falling apart? 

 

Are authorities also acknowledging the effects of diminishing returns on their fiscal tools?  Or are they running out of fiscal space? 

 

More… 

 

“The government constantly runs the risk of exacerbating inflationary pressures and, by extension, heightening the severity of economic contractions,” the CPBRD said. (bold added) 

 

Are they also admitting to the boom-bust cycles it creates? 

 

Only a few people openly acknowledge the inflationary impact of public/deficit spending, even when most economists know this.   

 

Since the mainstream embraces public/deficit spending as sacrosanct, political correctness demands conformity to this belief, hence its suppression. 

 

II. How Public Spending Causes Inflation

Figure 1 

 

Due to higher prices (from liquidity expansion), the rising trend of public revenues has mainly contributed to the present decline of the fiscal deficit (as of August). (Figure 1, topmost graph) 

 

This slowdown is about change once the economy fumbles. 

 

Even with revenues up, eight-month Treasury liquidity has been dropping.  As such, Treasury borrowings have picked up.  (Figure 1, middle chart) 

 

Deficit spending is not inflationary when funded solely by taxes.  However, since the capacity to tax is constrained, this implies innate spending limits. But that won't fit well with a populist government. 

 

Budget gaps are inflationary when funded by credit and money creation from the central bank (BSP) and the banks.   

 

Credit expansion unbacked by savings increases demand relative to supply.   

 

The long-term trend of public spending has resonated with the CPI. (Figure 1, lowest diagram) 

 

Let us use the rice industry as an example.  

 

The BSP can print money, while banks can issue credit, but both can't print rice.  Many other factors determine rice production than cheap money, such as protectionism, controlled markets, weather, productivity, farming lands, irrigation, fertilizers, returns, farmer’s income, etc. 

 

Meanwhile, increases in public spending benefit public agencies and private sector entities directly and indirectly involved with the bureaucracy and their political projects (e.g., PPPs) by expanding their demand.   

 

Or demand (for rice) from the public sector increases faster than the supply of rice.  

 

The consequential imbalances lead to tight supply and higher prices, which the government responds with price controls and even more deficit spending via subsidies.   

 

Because bailouts are integral to public spending, the recent path-dependent policy response is a byproduct or a legacy of the BSP's easy money policies.  

 

Or authorities throw money at social problems because they think financial repression (inflation tax) would accommodate it. 

 

Recently, the government has splurged on bailouts.  It has authorized billions in subsidies for farmers and sari-sari store owners affected by the rice price caps.  It also has provided grants to the transport sector affected by higher energy prices (Php 4 billion fuel subsidies).    

 

Therefore, the government's mechanical demand-based solution exacerbates supply imbalances.  

 

Besides, public spending, representing transfers, consumes people's savings.   

 

So, this vicious cycle progresses.  

 

III. The Collateral Function of Public Debt 

 

Public spending is not the only reason for the issuance of public debt.  

Figure 2 

 

Public debt has a collateral function, which banks use to obtain financing from the BSP.    

 

In essence, the BSP uses government securities (including its own BSP Securities Bill) as part of its monetary operations to provide liquidity to or withdraw liquidity from the financial system.   

 

Since its introduction, BSP Bills Payable in the BSP’s balance sheet have exploded and grabbed a substantial share of the volume of the fixed-income security markets traded at the PDS. (Figure 2) 

 

Figure 3 

 

Applied to the present, banks have recently taken over in providing liquidity to the government and financial system. 

 

The banking system's Net claims on Central Government (NCoCG) are close to their historic high even while the BSP's NCoCG has slowed (as of August). (Figure 3, topmost window) 

 

And so, while the BSP is supposedly "tightening" by raising rates, banks continue to amass public debt, providing liquidity to the government and financial system.  The chart reveals the incredible record monetization of government debt by banks. (Figure 3, middle graph) 

 

In the meantime, Treasury securities are used as collateral by banks when borrowing or obtaining finance from the BSP.  

 

Further, as the government issues even more debt, this requires more currency issuance to accommodate it.  M3 has supported public spending growth through the years. (Figure 3, lowest chart) 

 

The government benefits from "seignorage," paying bondholders with depreciated currency (Financial repression/inflation tax).  

 

Hence, because the easy money regime functions as a free lunch, government indulges in a spending orgy, which benefits banks too. 

 

IV. From Automatic Stabilizers to Fiscal Dominance  

Figure 4 

 

In the past, contemporary governments used the Keynesian framework of countercyclical policy of deficit spending as an "automatic stabilizer" tool.  Authorities embark on public works when aggregate demand slows, evidenced by high unemployment or slowing or contracting growth.   But when growth resumes and accelerates, they raise taxes to control inflation and moderate growth.   

 

But things change.   

 

In the recent past, with the idea that rising inflation is a "transitory" phenomenon, governments have become addicted to it.  Governments have leaned on pro-cyclical policies. 

 

Deficit spending became a primary policy of GDP management irrespective of conditions.    

 

This dynamic applies here too.  

 

As it is, the government previously depended on the BSP's monetary policies of low rates to provide nominal spending growth and, therefore, tax revenue growth. At the same time, the BSP uses the same money tools to manage inflation. 

 

The embedded assumption is that the economy is like a car, which can be accelerated or decelerated by its driver (the government & the BSP). 

 

This dynamic is especially relevant today as the stabilizing function of the government budget has transformed into "fiscal dominance."   The US deficit is an example. (Figure 4) 

 

The "ratchet phenomenon" syndrome has also afflicted governments. Authorities have used recent crises to justify further expansion of control and power through the fiscal channel. 

 

The popularity of the expanded powers of government has increased during the crisis.  It seems to have been supported by a psychological and ideological shift.  Increased feelings of vulnerability made people seek comfort in expanded political control. 

 

More importantly, the underlying behavioral structure could not revert to the status quo ante because the events of the crisis created new understandings of and convictions about the potentialities, workings, dangers, and desirabilities of governmental action; that is, each crisis altered the prevailing ideological climate. Though the postcrisis economy and society might, at least for a while, appear to have returned to precrisis conditions, this appearance disguised the underlying reality. In the minds and hearts of the people who had passed through the crisis and experienced the expanded governmental powers—that is, at the ultimate source of behavioral response to future exigencies—the underlying structure had indeed changed. (Robert Higgs, 1985) [bold added] 

 

Stockholm’s Syndrome?

In this context, governments increasingly have used deficit spending to centralize the economy, which means that the executive branch has taken control of policies from the central banks—as the latter has been tightening. 

 

And with the likelihood of a deepening economic downturn, which magnifies the risks of a crisis, the deficits should reaccelerate from their recent deceleration.   Deficits would soar from a revenue slump and a further spike in government spending (bailouts, fiscal transfers, "stimulus" via public works, etc.). 

 

This dynamic should apply to the Philippine political-economic setting as well.  

 

V. Risks of Excessive Deficit Spending: Debt Crisis and Hyperinflation 

 

One risk of excessive government spending is that creditors lose faith in the ability of governments to redeem their liabilities.   A "sudden stop," where creditors pull back, usually results in a debt crisis. 

 

Another risk is that when access to credit has vanished, governments increasingly depend on their central bank's printing press, leading to hyperinflation.  

 

Some governments might be crazy enough to use this to extinguish their debt. 

 

When assessing the debt burden, the rate of price inflation constitutes an important factor. Price inflation devalues outstanding debt. This happens in a creeping way when inflation rates are low and in a dramatic way when inflation rates are high. In the case of hyperinflation when ordinary goods of daily consumption fetch prices in the billions or trillions even a gargantuan public debt would evaporate. However, a deliberate fabrication of hyperinflation in order to get rid of the debt burden can hardly count as a rational strategy. Such a policy would come at the price of wreaking havoc with the economy as a whole. (Mueller, 2012) 

 

"Runaway inflation" is a path to or another word for hyperinflation. 

 

Except for the think tank above, the mainstream crowd usually ignores such risks.   

 

They have come to believe that public spending can only result in positive outcomes while the impact of debt is neutral.   

 

Again, such mindsets signify inflationary psychology borne of the programming from decades of the easy money regime.  

 

But that’s about to change too.  

 

VI. Rising USD Share of Philippine Public Debt: "Rising USD Shorts" 

Figure 5 

 

For instance, the outgrowth of foreign debt has increased its share of the total Philippine debt stock since Q1 2021 (as of August 2023).   (Figure 5, upper chart) 

 

While the frail peso may partially be responsible for its increase, a build-up of foreign-denominated debt has resulted in most increases.  Media reported that the Philippine government "secured $32.40 billion worth of loans and grants in 2022." 

 

The increase in foreign debt to fulfill near-term economic or financial requirements (say, support the peso or finance trade deficit or for BSP’s GIR management) translates to a "short USD position."   

 

"Short" implies funding mismatches. 

 

Such imbalance occurs when organic financing is inadequate to meet the maturing liabilities.   In this case, increased borrowing is used to refinance existing liabilities.  In short, shades of Ponzi finance, debt piles up on the mountain of existing debt, along with the mismatches.  

 

Once you create those “dollar” assets, you are on the hook for funding them, in “dollars”, until they are disposed of – voluntarily or not. (Jeffrey Snider, 2018) 

 

Should the peso continue to weaken, the economy would have to export more to meet its FX obligations. Otherwise, this puts further pressure on the currency—a feedback loop.  

 

This widening mismatch increases the nation's vulnerability to a currency or external debt crisis.   

 

Yet, a global USD shortage would make borrowing and refinancing costlier, exert further strains on the peso (as the BSP drains its reserves), and aggravate such risk conditions. 

 

As a side note, since 2018, "other reserve assets" (ORA) (Financial derivatives, repos, etc.) have comprised a substantial segment of the BSP's Gross International Reserve (GIR) according to the IMF's International Reserves and Foreign Currency Liquidity (IRFCL).  ORA accounted for 8.11% of the GIR as of August 2023. (Figure 5, lower window) 

 

Rising FX rates mean the costlier use of ORA to manage the GIRs, which is one possible reason its use has declined. 

 

In the end, the law of scarcity means that the Philippines is not immune to the risks emanating from excessive deficit spending.   

 

Along with the think tank's caution, with the temptation to exercise "fiscal dominance," risks should only accelerate.  

 

___ 

References 

 

Robert Higgs, Crisis, Bigger Government, and Ideological Change Independent Institute January 1, 1985 

 

Antony P. Mueller, The Economics of the Fiscal Cliff Financial Sense.com November 8, 2012 

 

Jeffrey P Snider, Some First Principles Of A ‘Dollar Short’ Alhambra Investments, April 16, 2018