Which Is the Black Swan for the Philippines: The Big One or War?

  

Never think that war, no matter how necessary, nor how justified, is not a crime—Ernest Hemingway 

In this issue: 

Which Is the Black Swan for the Philippines: The Big One or War?

Part 1. Thesis: Nature: The Big One

1A. The Wittgenstein Trap

1B. Between Tectonics and Politics

Part 2. Anti-Thesis: Human Action: Man-Made Disasters

2A. Brewing Crisis: Second ‘Ayungin’ Thomas Shoal Incident

2B. Chinese 36 Stratagems in Action

2C. Escalation Beyond the Shoals

2D. The Root of War: Human Action

2E. Thai-Cambodia Border Clash and Thai’s Domestic Policy Fissure

2F. Fatalities: Wars Eclipse Earthquakes

2G. Unknown Unknowns-Black Swan Event: The Final Trigger

Part 3. Synthesis: Nature’s Convulsions vs. Man-Made Catastrophes

3A. The Human Trigger

3B. The Shape of Future Wars and the Grey Swan

3C. War Economies and Systemic Fragility

3D. Conclusion: The Shape of the Next Black Swan

 

Which Is the Black Swan for the Philippines: The Big One or War? 

Nature versus human action—which would happen first, and which would be deadlier?

Part 1. Thesis: Nature: The Big One 

A string of significant earthquakes—magnitude 5 and above—has recently shaken the Philippines.

Figure 1 

From Cebu’s 6.9 (September 30) to Davao Oriental’s 7.4 (October 10), to Negros Occidental and Zambales’s 5.1 (October 11), to Surigao del Sur’s 6.0 (October 11), to Surigao del Norte’s 6.2 (October 17) and to Ilocos Norte’s 5.2 (October 17), the tremors have been relentless and have drawn public anxiety. Both Cebu and Davao Oriental continue to record over a thousand aftershocks. (Figure 1) 

Despite denying possible interconnections among these tremors, officials and media have begun to promote the likelihood of "The Big One" in the National Capital Region—a 7.2-magnitude quake expected to “bring catastrophic destruction” to Metro Manila. 

The Philippine Institute of Volcanology and Seismology (PHIVOLCS) bases its forecast or hazard assessments on the West Valley Fault’s recurrence interval of 400–600 years, suggesting that “its next movement may possibly happen earlier or later than 2058.”

A Japan International Cooperation Agency (JICA) study further estimates that The Big One could result in 33,500 fatalities and 113,600 injuries.

Adding to the anxiety is talk of a “Culebra Event,” coined by independent researcher Brent Dmitruk, describing a potential chain reaction of earthquakes triggered by tectonic stress transfer across fault systems—like a slithering snake (culebra in Spanish). Though unsupported by mainstream seismology, the idea captures public fear that defies conventional models and timelines.

The Philippines, of course, is no stranger to major quakes and has endured two major quakes in modern history:

The Moro Gulf Earthquake (August 17, 1976, magnitude 8.1) near Mindanao and Sulu caused 5,000–8,000 deaths, from both quake and tsunami.

The 1990 Luzon Earthquake (July 16,1990. magnitude 7.8) centered in Rizal, Nueva Ecija, killed 1,621 and injured 3,500, destroying buildings even in Metro Manila—though fatalities in the NCR were limited to three.

First, these events show that even the strongest recorded quakes—occurring decades ago and in poorer eras—produced casualties below 10,000.

Second, with today’s supposed technological advances, stricter building codes, and a “wealthier” economy, it is doubtful that "The Big One" would match JICA’s apocalyptic estimates—unless the quake’s magnitude or duration exceeds historical precedents.

Third, when PHIVOLCS says it may occur "earlier or later than 2058," it essentially admits ignorance or uncertainty, dressed up as science. The 400–600-year interval is a broad statistical range—based on paleoseismic trenching data—not a clock.  

If the Big One hits in 2058 or later, many of us won’t be around to validate the prophecy—unless futurist Ray Kurzweil’s “Singularity” delivers on its promise to merge machine intelligence and humanity in the quest for immortality.

Fourth, earthquake prediction remains closer to numerical choreography than precise science.

As Wikipedia notes: “After a critical review of the scientific literature, the International Commission on Earthquake Forecasting for Civil Protection (ICEF) concluded in 2011 that there was considerable room for methodological improvements. Many reported precursors are contradictory, lack measurable amplitude, or are unsuitable for rigorous statistical evaluation." 

Even behavioral studies of animals as predictors have failed to establish reliability—no constants, no reproducibility. 

As Wikipedia notes, many earthquake ‘predictions’ are remembered only when they appear to hit — a textbook case of selection bias. In reality, misses vanish quietly into obscurity, while lucky coincidences are framed as scientific foresight. 

To date, no model has achieved reproducible accuracy in predicting the exact timing, magnitude, or location of a major quake—anywhere in the world. 

1A. The Wittgenstein Trap 

Seen through Wittgenstein’s Ruler (as applied by Nassim Taleb): 

Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table, you may also be using the table to measure the ruler. 

Applied here, government agencies present statistical intervals as confidence. If a quake happens within the range, it validates neither the model nor the state—it only confirms that earthquakes happen eventually.

If it doesn’t, the model isn’t falsified—it’s simply "extended." 

Duh! 

That’s the Wittgenstein trap: the model (the ruler) is never truly tested by reality (the table). Every outcome is reinterpreted to preserve authority. 

The likelihood that earthquake models hit their prediction—timing, location, and magnitude—is effectively near zero. 

Their utility lies not in prophecy but in policy: infrastructure codes, disaster preparedness, funding and others. More importantly, the political need to manage fear. 

Keep this in mind, the "Big One" may eventually occur—but whether it happens as predicted is almost entirely coincidental. 

And when it does, its qualitative effects are likely to depart significantly from the scenarios sold to the public by official experts. 

1B. Between Tectonics and Politics

Figure 2

Earlier, we proposed in our October 10 post on X.com that these seismic episodes may be “coincidental geologically, yet symbolically it feels as though the ground beneath us—literally, institutionally, and metaphorically—is shifting.”  (Figure 2) 

That remark, written amid an unfolding corruption probe, captured a deeper truth: instability in governance mirrors instability in nature. Both release pressures accumulated over time—one through tectonic strain, the other through moral decay—manifesting as eroding trust, public fatigue, and cynicism toward those meant to uphold order. 

Thus, the “Big One” is not merely a geological prophecy but an allegory for a state under pressure, its faults widening both underground and within. Economic tectonics—liquidity cycles, capital migrations, and policy misalignments—converge with political fault lines, creating a landscape where what is called “resilience” may simply be the calm before the rupture. 

For while nature’s tremors follow blind physics, the greater danger lies in human volition—where pride, fear, and miscalculation can unleash catastrophes far deadlier than any fault line. 

The next rupture may not come from the earth, but from the choices of men. 

Part 2. Anti-Thesis: Human Action: Man-Made Disasters

Figure 3

2A. Brewing Crisis: Second ‘Ayungin’ Thomas Shoal Incident

While the heebie-jeebies over “The Big One” and other earthquakes often grip the public, a more insidious tremor unfolds daily in the South China Sea. Media reports chronicle near-constant confrontations between China’s military and Philippine forces: Chinese jets tailing Philippine Coast Guard aircraft over Bajo de Masinloc, warships aiming lasers at Filipino fishermen, and water cannons battering resupply missions to contested shoals. (Figure3) 

The Second ‘Ayungin’ Thomas Shoal incident on June 17, 2024 marked one of the most volatile flashpoints in recent years. 

During a resupply mission to the BRP Sierra Madre—a grounded WWII-era vessel serving as a Philippine outpost—China Coast Guard (CCG) personnel rammed, boarded, and wielded machetes and axes against Philippine Navy boats. The skirmish left several Filipino personnel injured, one severely. Some officials described it as a “near act of war.” 

Even prior to this, China’s repeated use of water cannons had already prompted warnings that a Filipino fatality could trigger the 1951 U.S.–Philippines Mutual Defense Treaty (MDT). 

Still, officials refrained from escalating the matter, citing the absence of firearms—an example of legal technicalities serving as political veneer. 

But let’s be candid: this "restraint" was not a purely local decision. 

The United States, already deeply entangled in the Russia–Ukraine war and the Israel–Palestine–Hezbollah–Iran conflict, has been supplying arms, intelligence, logistics, funding and etc., across multiple theaters, likely sought to avoid opening another front with China. With its strategic bandwidth stretched thin, Washington may have quietly signaled Manila to stand down, avoiding direct escalation with Beijing. 

2B. Chinese 36 Stratagems in Action 

China’s tactical behavior in the South China Sea mirrors or aligns with several of the Thirty Six Stratagems, a classical Chinese playbook for deception and maneuver: 

1. Beat the grass to startle the snake – China’s repeated use of water cannons, laser targeting, and close flybys—especially when Philippine vessels are accompanied by media or U.S. observers—serves as deliberate provocation to test: 

A) Philippine resolve and limits under Marcos Jr.’s more assertive maritime stance; 

B) U.S. response thresholds under the 1951 Mutual Defense Treaty—will Washington truly go to war for Manila or is this just posturing? 

C) Sphere of Influence: Test ASEAN’s cohesion, identifying weak links, wavering partners, and potential recruits for Chinese influence 

2. Sacrifice the plum tree to preserve the peach tree – Accept small losses to secure larger strategic interests. China may tolerate reputational costs (international condemnation, legal rebukes) to maintain de facto control of contested waters and normalize its presence. 

3 Make a sound in the east, then strike in the west – Create diversions to mask true objectives. While public attention centers on high-profile flashpoints like Second Thomas Shoal, China quietly fortifies other positions such as the Paracel, (Subi Reef) Spratly Islands and Luconia Shoals, expanding influence with minimal resistance U.S. Army Pacific. 

There are more, but we opted to limit it to these. 

2C. Escalation Beyond the Shoals 

Philippine leadership has also amplified its rhetoric on Taiwan, signaling a shift from territorial defense to strategic alignment with U.S. interests. Defense Secretary Gilberto Teodoro’s visit to Mavulis Island, the northernmost Philippine outpost near Taiwan, was interpreted by Beijing as a provocative move. 

The United States, for its part, has accelerated its military buildup in the Philippines—provoking sharp responses from Beijing. 

• MRC Typhon: Mid-Range missile platform capable of launching SM-6 and nuclear capable Tomahawk missiles 
• NMESIS: Anti-ship missile system
• MADIS: Air defense system designed to counter drones and aerial threats 

These deployments have drawn sharp rebukes from China, which views them as encirclement. 

2D. The Root of War: Human Action 

While wars may have complex causation, their ignition essentially boils down to human action—impulse, emotion, pride, ambition, ideology, faith, fear or the pursuit of power. 

Figure 4 

Whether it’s:

• Mythic provocation (Helen of Troy)
• Territorial hunger (Lebensraum)
• Political culture (Bushido, Spartan honor)
• Ideological clash (nationalism, communism, democracy)
• Faith and doctrine (religious wars)
• Oppression and independence (colonial revolts) 

…each war is a man-made disaster, often more devastating than nature’s fiercest convulsions. (Figure 4) 

Again, history’s wars are rarely accidents of circumstance; they are the culmination of deliberate human choices, ambitions, and fears. Each cause—territorial, ideological, or psychological—reflects a particular configuration of human action under pressure 

2E. Thai-Cambodia Border Clash and Thai’s Domestic Policy Fissure 

Take the recent case of the Thai–Cambodia border clashes, which erupted on July 24, 2025, and lasted five days. The conflict resulted in 38 confirmed deaths, over 300,000 civilians displaced, and dozens injured. A U.S.–China–ASEAN-brokered ceasefire was reached on July 28 in Putrajaya, Malaysia, though violations were reported within days.

While tensions trace back to colonial-era boundary ambiguities—notably the Franco-Siamese Treaties of 1904 and 1907—the immediate trigger was political destabilization in Thailand. A leaked phone call between Prime Minister Paetongtarn Shinawatra and Khleang Huot, Deputy Governor of Phnom Penh, exposed internal rifts between Thailand’s civilian leadership and its military establishment. The fallout led to Paetongtarn’s ouster, which reportedly emboldened the Thai military, escalating border hostilities and complicating diplomatic restraint. 

This episode exemplifies how domestic political fractures—especially civil-military dissonance—can act as a proximate cause of war, even when historical grievances simmer in the background. 

Although the engagement occurred without the direct involvement of superpowers, the casualties, displacement, and property damage were almost comparable to those from a major earthquake. 

2F. Fatalities: Wars Eclipse Earthquakes 

But this is a mere tremor compared to the tectonic toll of modern wars. In the Russia–Ukraine conflict and the Israel–Palestine–Hezbollah–Iran escalation, aggregate casualties have surged into the tens of thousands, with entire cities reduced to rubble and economies hollowed out. 

Zooming out, the 20th century offers even starker metrics:

• World War I: ~20 million deaths
• World War II: ~60–85 million deaths (approximately 500,000 to 1 million Filipinos perished)
• Korean War: ~3 million deaths
• Vietnam War: ~2–3 million deaths

 These are not just numbers.  Wars inflict far greater devastation on society—its people, its social fabric, capital, financial and economic wellbeing—than most natural disasters. 

2G. Unknown Unknowns-Black Swan Event: The Final Trigger 

Former U.S. Defense Secretary Donald Rumsfeld, defending the absence of evidence linking Iraq to weapons of mass destruction, famously invoked the concept of “unknown unknowns”—the things we don’t know we don’t know. 

In many ways, Black Swan events fall under this same category. They share three defining traits: they are unpredictable, highly improbable, and extremely consequential—whether catastrophic or transformative. 

Part 3. Synthesis: Nature’s Convulsions vs. Man-Made Catastrophes 

The fault lies not in our stars, but in ourselves—Shakespeare (Julius Caesar) 

Geological cycles and seismic displacements will inevitably occur—whether tomorrow, next year, or within our lifetime. But despite their scientific veneer, no current technology can predict their timing or magnitude with precision. And when framed within historical context, their feared impact may be less apocalyptic than media portrayals suggest. 

Still, situational awareness and preparedness should remain a universal goal—to prevent one from becoming a collateral of what Nature or Providence may unleash. 

3A. The Human Trigger 

By contrast, wars are man-made disasters—often triggered not by grand strategy, but by accidents, miscalculations, and misinterpretations, all fueled by human frailties. The daily confrontations in the South China Sea could easily escalate into a bilateral kinetic engagement, like the Thai–Cambodia or India–Pakistan border clashes.

Should escalation occur—and if the Philippines invokes the 1951 Mutual Defense Treaty with the United States—the world could awaken to the unthinkable: a third world war. This is not hyperbole—it’s a structurally plausible outcome.

And this could happen anytime. As long as belligerence dominates bilateral policy, the spark could ignite today, tomorrow, next week, or a year from now. The extent of destruction remains deeply unknown—dependent on the nature and scale of warfare employed.

3B. The Shape of Future Wars and the Grey Swan

Unlike World War II, which pursued territorial conquest, modern warfare is more strategic than expansive. In the Russia–Ukraine war, occupation has largely focused on Donetsk and Luhansk —ethnically Russian regions—with limited push toward Kyiv. In contrast, the Israel–Middle East conflict may reflect ambitions for a Greater Israel, with broader territorial implications.

Yet the Philippine public remains benumbed—desensitized by repetition and diversion, dulled by inertia. This jaded reaction blinds us to escalation, even when its architecture is already in place.

It’s not a Black Swan—it’s a Grey Swan: known, possible, but broadly discounted. 

3C. War Economies and Systemic Fragility 

Meanwhile, internal economic fragilities mirror these geopolitical tensions.

Figure 5 

The war economies of Thailand and the Philippines have been among the worst-performing Asian stock markets in 2025, down -8.97% and -6.73% year-to-date, respectively (as of October 17). Though internal fragility remains the primary concern, this also suggests that geopolitical tensions have contributed to the erosion of investor confidence. 

Despite global equities reaching record highs amid easy-money policies and the weak dollar, these two “war economies” remain laggards. 

If liquidity tightens globally, could leaders resort to military conflict—a survival mechanism cloaked in patriotism— as a means to divert public attention from political economic entropy? 

That’s our Black Swan. 

War is conscious cruelty compounded over time—the most preventable catastrophe, yet the one that most often eclipses nature’s fiercest convulsions.

3D. Conclusion: The Shape of the Next Black Swan 

In the end, both earthquakes and wars spring from ruptures—one from the shifting of tectonic plates, the other from the collision of human wills. The former is inevitable, a law of Nature; the latter is avoidable, yet repeatedly chosen. 

One humbles man before forces beyond comprehension; the other exposes the peril of his own hubris. Between Providence and pride lies the fragile equilibrium of civilization. Whether the next Black Swan rises from the earth’s crust or from the depths of human ambition, its impact will test not our technology, but our wisdom—our ability to foresee, restrain, and prepare before the unthinkable unfolds.

 

The BSP’s Seventh Rate Cut, the Goldilocks Delusion, and Technocracy in Crisis

  

Economic interventionism is a self-defeating policy. The individual measures that it applies do not achieve the results sought. They bring about a state of affairs, which—from the viewpoint of its advocates themselves—is much more undesirable than the previous state they intended to alter—Ludwig von Mises 

In this issue

The BSP’s Seventh Rate Cut, the Goldilocks Delusion, and Technocracy in Crisis

I. The Goldilocks Delusion: Rate Cuts as Ritual

II. Cui Bono: Government as the Primary Beneficiary

III. Wile E. Coyote Finance: The Race Between Bank Credit Expansion and the NPL Surge

IV. Minsky’s Warning: Fragility Beneath the Easing

V. Concentration and Contagion, The Exclusion of Inclusion: MSMEs and the Elite Credit Divide

VI. A Demand-Driven CPI? BSP’s Quiet Admission: Demand Weakness Behind Low Inflation

VII. Employment at the Edge of Fiction: Volatility, Illusion, and Structural Decay

VIII. The War on Cash and the Politics of Liquidity

IX. The War on Cash Disguised as Corruption Control

X. From Cash Limits to Systemic Liquidity Locks

XI. The Liquidity Containment Playbook and the Architecture of Control

XII. Curve-Shaping and Fiscal Extraction

XIII. When Discretion Becomes Doctrine: From Institutional Venality to Kindleberger’s Signpost

XIV. Conclusion: The Technocrat’s Mirage: Goldilocks Confronts the Knowledge Problem and Goodhart’s Law 

The BSP’s Seventh Rate Cut, the Goldilocks Delusion, and Technocracy in Crisis 

From rate cuts to cash caps: how the BSP’s containment playbook reshapes power and fragility in the Philippine economy

I. The Goldilocks Delusion: Rate Cuts as Ritual 

In delivering its “surprise” seventh rate cut for this August 2024 episode of its easing cycle, the BSP chief justified their decision on four grounds: 

• 1 Outlook for growth has softened in the near term
• 2 Growth was weaker because demand is weaker. This, in turn, is why inflation is low
• 3 Governance concerns on public infrastructure spending have weighed on business sentiment
• 4 “We’re still refining our estimates. We had thought that our Goldilocks policy rate was closer to 5 percent, now it’s closer to 4 percent. So we have to decide where we really are between 5 percent and 4 percent.” 

For a supposedly data-dependent political-monetary institution, the BSP never seems to ask whether rate cuts have delivered the intended results—or why they haven’t. The rate-cut logic rests on a single pillar: the belief that spending alone drives growth. 

In reality, the BSP’s spree of rate and reserve cuts, signaling channels, and relief measures has produced a weaker, more fragile economy.

Figure 1

GDP rates have been declining since at least 2012, alongside the BSP’s ON RRP rates. Yet none of this is explained by media or institutional experts. These ‘signal channeling’ tactics are designed for the public to unquestioningly accept official explanations. (Figure 1, upper chart) 

II. Cui Bono: Government as the Primary Beneficiary 

Second, cui bono—who benefits most from rate cuts? 

The biggest borrower is the government. Its historic deficit spending spree hit an all-time high in 1H 2025, reaching a direct 16.71% share of GDP. This is supported by the second-highest debt level in history—ballooning to Php 17.468 trillion in August 2025—and with it, surging debt servicing costs. (Figure 1, lower window) 

As explained in our early October post: 

• More debt → more servicing → less for everything else
• Crowding out hits both public and private spending
• Revenue gains won’t keep up with servicing
• Inflation and peso depreciation risks climb
• Higher taxes are on the horizon 

The likely effect of headline “governance concerns” and BSP’s liquidity containment measures—via capital and regulatory controls—is a material slowdown in government spending. In an economy increasingly dependent on deficit outlays, this amplifies what the BSP chief calls a “demand slowdown.” 

In truth, the causality runs backward: public spending crowding out and malinvestments cause weak demand. 

III. Wile E. Coyote Finance: The Race Between Bank Credit Expansion and the NPL Surge 

Banks are the second biggest beneficiaries. Yet paradoxically, despite the BSP’s easing cycle, the growth rate of bank lending appears to have hit a wall.

Figure 2

Gross Non-Performing Loans (NPL) surged to a record Php 550 billion up from 5.4% in July to 7.3% in August. (Figure 2, topmost image)

Because lending growth materially slowed from 11% to 9.9% over the same period, the gross NPL ratio rose from 3.4% to 3.5%—the highest since November 2024. This is the Wile E. Coyote moment: credit velocity stalls and NPL gravity takes hold. 

As we noted in September: 

“Needless to say, whether in response to BSP policy or escalating balance sheet stress, banks may begin pulling back on credit—unveiling the Wile E. Coyote moment, where velocity stalls and gravity takes hold.” 

Even BSP’s own data confirms that the past rate cuts have barely permeated average bank lending rates. As of July 2025, these stood at 8.17%—still comparable to levels when BSP rates were at their peak (8.23% in August 2024). The blunting of policy transmission reveals deep internal imbalances. (Figure 2, middle graph) 

Production loans (9.8%) signaled the slowdown in lending, while consumer loans (23.4%) continued to sizzle in August. The share of consumer loans reached a historic 15.5% (excluding real estate loans). (Figure 2, lowest visual) 

IV. Minsky’s Warning: Fragility Beneath the Easing 

The BSP’s admission that the economy has softened translates to likely more NPLs and an accelerating cycle of loan refinancing. Whether on the consumer or supply side, this incentivizes rate cuts to delay a reckoning 

From Hyman Minsky’s Financial Instability Hypothesis, this deepens the drift toward Ponzi finance: insufficient cash flows from operations prompt recycling of loans and asset sales to fund mounting liabilities. (see Reference)

Figure 3

As major borrowers, lower rates also benefit banks’ own borrowing sprees. While banks trimmed their August bond and bill issuances (-0.79% YoY, -3.7% MoM, share down from 6.52% to 6.3%), both growth rates and shares remain on an uptrend. (Figure 3, topmost graph) 

The slowdown in bank borrowing stems from drawdowns from BSP accounts—justified by recent reserve rate ratio (RRR) cuts. BSP’s MAS reported a Php 242 billion bounce in liabilities to Other Depository Corporations (ODC) in August, reaching Php 898.99 billion. (Figure 3, middle diagram) 

Ultimately, the seventh rate cut—deepening the easing cycle—is designed to keep credit velocity ahead of the NPL surge, hoping to stall the reckoning or spark productivity-led credit expansion. Growth theater masks the real dynamics. 

Rate cuts today are less about the economy and more about survival management within the financial system. 

V. Concentration and Contagion, The Exclusion of Inclusion: MSMEs and the Elite Credit Divide 

MSME lending—the most vital segment—continues to wane. Its share of total bank lending fell to a paltry 4.6% in Q2, the lowest since 2009. Ironically, MSME lending even requires a mandate. BSP easing has little impact here. (Figure 3, lowest visual) 

Some borrowers engage in wholesale lending or microfinancing—borrowing from banks to relend to SMEs. But if average bank lending rates haven’t come down, why would this segment benefit? 

Informal lenders, who fill the gap left by banks, absorb this risk—keeping rates sticky, as in the case of 5-6 lending. 

If lending to MSMEs remains negligible, who are the real beneficiaries of bank credit?

The answer: elite-owned, politically connected conglomerates.

Figure 4

In 1H 2025, borrowings of the 26 non-financial PSEi members reached a record Php 5.95 trillion—up Php 423.2 billion YoY, or 7.7%. That’s about 16.92% of total financial resources (TFR) as of June 2025. Bills Payable of the PSEi 30’s 4 banks jumped 64.55% YoY to P 859.7 billion. (Figure 4, topmost graph) 

This concentration is reflected in total financial resources/assets: Philippine banks, especially universal-commercial banks, hold 82.7% and 77.1% of total assets respectively as of July. 

Mounting systemic fragility is being masked by deepening concentration. A credit blowup in one major sector or ‘too big to fail’ player could ripple through the financial system, capital markets, interest rate channel, the USD–PHP exchange rate—and ultimately, GDP. 

The structure of privilege and fragility is now one and the same.

VI. A Demand-Driven CPI? BSP’s Quiet Admission: Demand Weakness Behind Low Inflation 

The BSP chief even admitted "demand is weaker. This, in turn, is why inflation is low."

Contrastingly, when authorities present their CPI data, the penchant is to frame inflation as a supply-side dynamic. Yet in our humble opinion, this marks the first time that the BSP confesses to a demand-driven CPI. 

September CPI rose for the second consecutive month—from 1.5% to 1.7%. If the ‘governance issues’ have exacerbated the demand slowdown, why has CPI risen? Authorities pointed to higher transport and vegetable prices as the culprit. 

Yet core CPI slowed from 2.7% in August to 2.6% in September, suggesting that the lagged effects of earlier easy money have translated to its recent rise. 

But that may be about to change. 

The drop in core CPI to 2.6% YoY was underscored by its month-on-month (MoM) movement, as well as the headline CPI’s MoM, both of which were flat in September. Historically, a plunge in MoM tends to signal interim peaks in CPI. (Figure 4, middle and lowest diagrams) 

So, while the unfolding data suggest that public spending may slow and bank lending continues to decelerate, “demand is weaker” would likely mean not only a softer GDP print but an interim “top” in CPI. 

If inflation reflects weak demand, labor data should show the same — yet the opposite is being claimed 

VII. Employment at the Edge of Fiction: Volatility, Illusion, and Structural Decay 

Authorities also produced another remarkable claim—on jobs.

Figure 5

They say employment rates significantly rebounded from 94.67% in July to 96.1% in August, even as the August–September CPI rebound supposedly showed that “demand is weaker.” This rebound was supported by a sudden surge in labor force participation—from 60.7% in July to 65.06% in August. (Figure 5, topmost and middle charts) 

The PSA’s employment data defies structural logic. Labor swings like stocks despite rigid labor laws and weak job mobility. The data also suggest that the wide vacillation in jobs indicates abrupt shifts between searching for work and refraining from doing so—as reflected in the steep changes in labor force participation. 

Furthermore, construction jobs flourished in August even amid flood-control probes, reflecting either delayed fiscal drag—or inflated data, to project immunity of labor markets from governance scandals. (Figure 5, lowest graph) 

Yet high employment masks poor-quality, low-literacy work—mostly in MSMEs—which explains elevated self-rated poverty and hunger rates. 

Additionally, both employment and labor force data have turned ominous: a rounding top in employment rates, while labor force participation also trends downward. 

Despite tariff woes, the slowdown in manufacturing jobs remains moderate. 

Nonetheless, beneath this façade, record consumer credit and stagnant wages reveal a highly leveraged, increasingly credit-dependent household sector. 

Labor narrative inflation—the embellishment of job metrics—would only exacerbate depressed conditions during the next downturn, leading to sharper unemployment. 

When investors interpret inaccurate data as fact, they allocate resources erroneously. The resulting imbalances won’t just show up in earnings losses—they’ll manifest as outright capital consumption. 

And while public spending may be disrupted, authorities can always divert “budget” caught in controversies to other areas. 

That said, jobs decay could rupture the banks propping up this high-employment illusion. 

VIII. The War on Cash and the Politics of Liquidity 

This week puts into the spotlight two developments which are likely inimical to the banking system, the economy and civil liberties. 

This Philstar article points to the banking system’s implementation of the BSP’s Php 500,000 withdrawal cap, which took effect in October. 

We earlier flagged seven potential risks from the BSP’s withdrawal limit: financial gridlock that inhibits the economy; capital controls that permeate into trade; indirect rescue of the banking system at the expense of the economy; possible confidence erosion in banks—alongside CMEPA; tighter credit conditions; rising risk premiums and capital flight; and, finally, the warning of historical precedent. (see reference) 

For instance, we wrote, "these sweeping limits target an errant minority while penalizing the wider economy. Payroll financing for firms with dozens of employees, capital expenditures, and cash-intensive investments and many more aspects of commerce all depend on such flows." 

The Philstar article noted, "Several social media users, particularly small business owners, expressed frustration over the stricter requirements and said that the P500,000 daily cash limit could disrupt operations and delay payments to suppliers."

Sentiment is yet to diffuse into economic numbers, but our underlying methodological individualist deductive reasoning is on the right track. 

IX. The War on Cash Disguised as Corruption Control

One of the critical elements in the BSP withdrawal cap is its requirement that the public use ‘traceable channels.’

The “traceable channels” clause reveals the BSP’s dual intent. 

On media, it’s about anti–money laundering and transaction transparency. In practice, it forces liquidity to remain inside the banking perimeter—deposits, e-wallets, and interbank transfers that cannot exit as cash. 

Cash, the last bastion of transactional privacy and immediacy, is being sidelined. This is not a war on crime; it’s a war on cash. 

The effect is to silo money within the formal system, preventing it from circulating freely across the real economy.

Figure 6

In August, cash-to-deposit at 9.84% remained adrift near all-time lows, while the liquid-asset-to-deposit ratio at 47.72% hit 2020 pandemic lows—both trending downward since 2013. (Figure 6, topmost pane) 

X. From Cash Limits to Systemic Liquidity Locks 

What looks like a compliance reform is, in truth, a liquidity containment measure. 

By capping withdrawals at Php 500,000, the BSP traps liquidity in banks already facing balance sheet strain. This buys temporary stability, allowing institutions to meet reserve ratios and avoid visible stress, but it starves the cash economy—especially small businesses dependent on operational liquidity. 

Economic losses eventually translate to non-performing loans, erasing whatever short-term relief liquidity traps provided. When firms struggle to repay, banks hoard liquidity to protect themselves—contracting credit and deepening the slowdown. The policy cure becomes the crisis catalyst. 

XI. The Liquidity Containment Playbook and the Architecture of Control 

This is not an isolated act; it fits a broader policy playbook: 

• Easy Money Policies: Reduce the cost of borrowing in favor of the largest borrowers, often at the expense of savers and small lenders. 
• CMEPA: The Capital Market Efficiency Promotion Act, which expands regulatory reach over capital flows and market behavior, while rechanneling private savings toward state and quasi-state instruments. 
• Soft FX Peg: The USDPHP peg, designed to constrain inflation, masks currency fragility and limits monetary flexibility. 
• Price Controls: MSRP ceilings distort price signals and suppress market clearing, especially in essential goods. 
• Administrative Friction: Regulatory hurdles replace fiscal support, extracting compliance and liquidity rather than injecting relief. 

Add to that the BSP’s ongoing yield curve-shaping—suppressing long-term yields to sustain public debt rollover—and what emerges is a clear strategy of financial containment: liquidity is captured, redirected, and immobilized to defend a strained financial order. 

XII. Curve-Shaping and Fiscal Extraction 

The post–rate cut yield curve behavior in the Philippines reveals a dual narrative that’s more tactical than organic. On one hand, the market is signaling unease about inflation—particularly in the medium term—yet it stops short of pricing in a runaway scenario. This ambivalence is reflected in the belly of the curve, where yields have dropped sharply despite flat month-on-month CPI and only modest year-on-year upticks. (Figure 6, middle and lowest graphs) 

On the other hand, the BSP appears to be engineering a ‘bearish steepening’ through tactical easing, likely aimed at supporting bank margins and stimulating credit amid a backdrop of rising NPLs, slowing loan growth, and liquidity hoarding. 

The rate cut, coming on the heels of July’s CMEPA and amid regulatory tightening, suggests a deliberate attempt to offset balance sheet stress without triggering overt inflation panic. 

Each of these measures—cash caps, regulatory absorption of savings, and engineered curve shifts—forms part of a single containment architecture. What looks like fragmented policy is, in reality, coordinated liquidity triage. 

In sum, fiscal extraction, liquidity controls, and curve manipulation are now moving in tandem. Each reinforces the other, ensuring that capital cannot easily escape the system even as trust erodes. 

The war on cash, then, is not about corruption or transparency—it’s about preserving liquidity in a system that has begun to run dry.

XIII. When Discretion Becomes Doctrine: From Institutional Venality to Kindleberger’s Signpost 

And then the BSP hopes to expand its extraction-based “reform.” This ABS-CBN article reports that the central bank plans to issue "a new policy on a possible threshold for money transfers which will cover even digital transactions." It would also empower banks to "refuse any transaction based on suspicion of corruption." 

Ironically, BSP Governor Eli Remolona cited as an example a contractor’s ‘huge’ withdrawal from the National Treasury—deposited into a private account—which he defended as "legitimate." 

The war on financials is evolving—from capital controls to behavioral nudging to arbitrary discretionary thresholds. BSP’s move to cap money transfers reframes liquidity as suspicion, and banks as moral adjudicators. 

Discretion to refuse transactions—even without proof—creates a regime where access to private property is conditional, not on law, but on institutional discomfort. 

Remolona’s defense of a bank that released a “huge amount” to a contractor despite unease confirms what we’ve recently argued: the scandal was never hidden—it was institutionally tolerated. 

Bullseye! 

Two revelations from this: 

First, it validates that this venal political-economic framework represents the tip of the iceberg—supported by deeply entrenched gaming of the system, extraction, and control born of top-heavy policies and politics. 

Two. It serves as a Kindleberger’s timeless signpost—that swindles, fraud, and defalcation are often signals of crashes and panic: 

"The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut, induce still more to cheat in order to save themselves. And the signal for panic is often the revelation of some swindle, theft, embezzlement, or fraud." (Kindleberger, Bernstein)

In this sense, the BSP’s moralistic posture and arbitrary discretion may not be acts of reform, but symptoms of a system inching toward its own reckoning. The façade of prudence conceals a liquidity-starved order struggling to maintain legitimacy—where control replaces confidence, and “reform” becomes a euphemism for survival. 

All this suggests that, should implementation be rigorous, the recent earthquakes may not be confined geologically but could spill over into financial institutions and the broader economy. If these signify a “do something” parade of ningas cogon policies, then the moral decay born of the public spending spree will soon resurface. 

Either way, because of structural sunk costs, the effects of one intervention diffusing into the next guarantees the acceleration and eventual implosion of imbalances that—like a pressure valve—will find a way to ventilate. 

XIV. Conclusion: The Technocrat’s Mirage: Goldilocks Confronts the Knowledge Problem and Goodhart’s Law 

Finally, the BSP admits to either being afflicted by a knowledge problem or propagating a red herring: "We’re still refining our estimates. We had thought that our Goldilocks policy rate was closer to 5 percent, now it’s closer to 4 percent. So we have to decide where we really are between 5 percent and 4 percent." 

This confession exposes the technocratic folly of believing that economic equilibrium can be engineered by formula. It ignores the fundamental truth of human action—there are no constants—and the perennial lesson of Goodhart’s Law: when a measure becomes a target, it ceases to be a good measure. Protecting the status quo, therefore, translates to chasing short-term fixes while evading long-term consequences. 

What this reveals is not calibration but confusion—policy reduced to trial-and-error within a liquidity-starved system. The “Goldilocks” rhetoric masks a deeper instability: that each attempt to fine-tune the economy only amplifies the distortions born of past interventions. 

We close this article with a quote from our October issue: 

"The irony is stark. What can rate cuts achieve in “spurring demand” when the BSP is simultaneously probing banks and imposing withdrawal caps? 

And more: what can they do when authorities themselves admit that CMEPA triggered a “dramatic” 95-percent drop in long-term deposits, or when households are hoarding liquidity in response to new tax rules—feeding banks’ liquidity trap?" 

____

References 

Ludwig von Mises, Bureaucracy, p.119 NEW HAVEN YALE UNIVERSITY PRESS 1944, mises.org 

Hyman P. Minsky, The Financial Instability Hypothesis The Jerome Levy Economics Institute of Bard College, May 1992 

Charles P Kindleberger & Peter L. Bernstein, The Emergence of Swindles, Manias Panics and Crashes, Chapter 5, p.73 Springer Nature link, January 2015 

Prudent Investor Newsletter, The Philippine Flood Control Scandal: Systemic Failure and Central Bank Complicity, Substack, October 5, 2025 

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

Prudent Investor Newsletter, Minsky's Fragility Cycle Meets Wile E. Coyote: The Philippine Banking System’s Velocity Trap, Substack, September 14, 2025