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
