Gold Manipulation: The Logical Outcome of Mainstream Economics (Sibileau)

by Martin Sibileau, A View From the Trenches

Please, click here to read this article in pdf format: February 21 2013

This is the first of three articles I will post on the suppression of gold. What drives me to write about the topic? I am tired of seeing endless proof of suppression (i.e. the typical take downs in the price at either 8:20am ET or at 10am-11am ET, with impressive predictability) and at the same time, it is unfair that anyone who voices this suppression be called a conspiracy theorist. Therefore, these three letters will give a rigorous theoretical support to the claim.

The first letter will show that, under mainstream economic theory, the suppression of the gold market is not a conspiracy theory, but a logical necessity, a logical outcome. From the publication of this letter onwards, the onus to prove the contrary will fall upon mainstream economists. The conspiracy theory will actually be the opposite: To claim that suppressing gold is not necessary.

The second letter will show how that suppression takes place. For those familiar with the gold market, this letter will offer nothing new and perhaps, it will even be incomplete. But at the macro level, I will seek to offer an insight.

The third letter will examine the consequences of this suppression and rigorously, prove that the claim of the gold bugs, namely that physical gold will trade at a premium over fiat gold or gold paper is also not a conspiracy theory, but the logical outcome of the current paradigm.

Before I begin, I would like to say that I think proving the logical implication from mainstream economics that gold needs to be suppressed is perhaps comparable to Von Mises demonstration of the impossibility of economic calculation under socialism. Both are very intuitive, of consequence, and a necessary intellectual step. Without further ado, let’s start with the first thesis: The suppression of gold is a logical necessity, under mainstream economics.

Axioms of mainstream economics

1.-Policy makers believe that there exists a general level of prices, and it can be measured by a price index (Ludwig Von Mises absolutely demolished this notion, but this is outside the scope of this letter. What is relevant is that price indices are “measured” and published by every nation and the market trades on them).

2.-Policy makers believe that in the long term, growth in the supply of money is neutral (Even David Hume laughed at this notion back in 1752)

3.-Policy makers use the general-equilibrium framework introduced by Léon Walras

4.-There exists a gold market and within this market, there are investors who see gold as money, as gold has been money for thousands of year

5.-In global trade, there is no relevant single price index, but relative prices, affected by cross exchange rates.

Thesis

If axioms 1-5 hold, both a global monetary coordination (as opposed to currency wars) as well as the suppression of the price of gold are required, for the global economic system to remain stable.

Demonstration

Between 1874 and 1877, the works of Léon Walras introduced the notion of general equilibrium in Economics. Considered by Schumpeter as “the greatest economist”, in 1874 Walras published “Éléments d’économie politique pure, ou théorie de la richesse sociale”, as he was teaching in Lausanne. His work examined the conditions necessary to reach equilibrium in an economic system, based on a system of simultaneous equations. To this day, mainstream economists, including those at the helm of central banks, rely on the framework of general equilibrium to work out the theses on which their policies are based.

For obvious reasons, I cannot be exhaustive and therefore fair to M. Walras in this short article. Briefly, general equilibrium in an economic system with (n+1) markets implies that if the first n markets are in equilibrium, the last market, n+1, must be in equilibrium as well. In the same fashion but at an aggregate level, if the n markets show an excess of demand (supply), the (n+1) market must have an excess of supply (demand) large enough to offset the sum of the excesses of the n markets. This conclusion is known as the Walras’ Law. It is important to note that it is not necessary that all markets be balanced (i.e. in equilibrium). That is only a particular case of the Walras’ Law, where if n markets show no excess of either demand or supply, the last one, market (n+1), is also balanced.

Applied to our context, if we think of the (n+1) market as the global money market and the same is oversupplied because every central bank is monetizing sovereign debt, it must hold that the rest of the markets, on aggregate, must be overdemanded for the world economy to be in equilibrium. That is exactly what policy makers believe they can achieve. To be precise, I shall call here the global money market to the aggregate of fiat currency markets.