IN 1970, a dollar bought a little over six pesos. It now buys more than 60. No monetary authority sat down and designed that 50-year slide. The peso weakness compounded one policy decision at a time, while everyone was looking at something else.
Let’s start with definitions, because the popular ones are wrong. Inflation is an increase in the money supply, not simply paying a higher price for something. Print more money, and each unit buys less, not because goods became scarcer, but because the currency measuring them increased in supply. The money supply in every government currency system goes only one direction. So does the price of everything bought with the money.
None of this is new. Roman emperors cut the silver content of the denarius from near purity to a splinter over two centuries, while still demanding the coin be accepted at face value. The mechanism has not changed, only the tools. Rome needed furnaces, silver, and time to debase a coin. A modern central bank needs a keyboard.
Why would any government choose this. It lets the state spend beyond what taxes or honest borrowing would allow, without ever asking voters to approve a tax increase. Milton Friedman called inflation ‘the one form of taxation that can be imposed without legislation.’ The government captures real purchasing power from everyone holding the currency, one peso at a time, and calls it monetary policy rather than a tax bill.
What most people mean by deflation is falling prices. Macroeconomists treat deflation as dangerous. Christine Lagarde, IMF Managing Director at the time, called it ‘the ogre that must be fought decisively.’
But falling prices caused by rising productivity are not a bad thing. They are the entire purpose of economic progress. A farmer who doubles his rice yield without doubling his costs should be able to sell rice more cheaply and still profit. That is what technology is supposed to do.
Lewis Carroll wrote a scene that should be read by economists. The Red Queen tells Alice that in her country, it takes all the running a person can do just to stay in the same place. To get anywhere else, you would have to run twice as fast. That describes what happened to wages after 1971, when the United States severed the dollar’s last tether to gold. Productivity kept climbing. Wages, adjusted for inflation, did not. Central banks were the ones moving the ground.
A gigabyte of hard drive storage cost roughly $5,000 in 1990. It can cost less than a peso today. Nobody filed that under economic catastrophe. The productivity gain was real but inflation absorbed it before it reached the person buying the drive.
The mechanism is not mysterious. Productivity gains should lower prices and raise real income. Central banks are mandated to prevent that from happening, targeting a steady rise in prices instead. Those gains flow to whoever already owns appreciating assets, property, equities, anything priced in a currency being deliberately debased. Wage earners run but are going nowhere. Asset holders stand still and get richer anyway.
The Philippines has its own version of this arithmetic. The BSP’s inflation target, two to four percent, is treated locally as discipline. It also guarantees, by design, that the peso in a Filipino worker’s pocket buys measurably less every year, even as call centers, agribusiness, and manufacturing post genuine productivity gains. Those gains are real. The distribution of the benefits is the problem.
Instead, they land in the PSEi, thin and dominated by a handful of conglomerate-linked issues, with retail participation a fraction of regional neighbors. When the market rises on liquidity rather than earnings, the beneficiaries are the already-invested. Everyone else watches pesos buy less rice, less fuel, less tuition, while being told low inflation is a policy success.
Artificial intelligence is about to compress this cycle. If AI delivers the productivity gains its promoters claim, the deflationary force will be larger than anything the global postwar economy has produced. Central banks, the BSP included, will face the same instinct that has governed them since 1971: offset it, rather than let it reach wage earners as cheaper prices.
None of this makes the Philippines a bystander. The BSP sets that inflation target every year, by choice. The PSEi’s thinness is not bad luck. It is decades of listing rules and family-controlled conglomerates protecting themselves from dilution. Manila built this.
Rome blamed the barbarians for its economic downfall through two centuries before anyone looked at what the emperor was doing to the money.
E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.