Fekete Questions Me, & Why Banning Usury Won't Work

(Fekete vs. Hommel on Basis vs. Usury)

Silver Stock Report

by Jason Hommel, June 14th, 2008

Antal Fekete was kind enough to respond to my last email, "Silver Shorts are so Naked, they've "Gone Wild", which was actually a response to his article, which was a response to my claims and Ted Butler's claims and others claims that many or most people who have promised silver for delivery probably don't have the silver to deliver.  Fekete's direct response has enough good questions for a solid interview or debate.  For the sake of clarity, below is the full text of his email.  Below that, I will publish his email again, with my responses in between, in italics, starting with "Jason: "  Finally, at the end, I have an essay that I had not previously published, that is important to publish at this time, called:
"Why Banning Usury Won't Work".

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To: Jason Hommel
Re: Primer on Usury, Silver Stock Report, June 12, 2008.
Date: June 14, 2008.

Dear Jason,

Thank you for your civil rejoinder to my piece Putting Loin-Cloth on the Naked Bogeyman. I welcome this opportunity for a high level discussion on the basis. Please consider this as my acceptance of your challenge. I am looking forward to this debate and I am willing to abide by the verdict of an informed public opinion beforehand, even if it rules against my position. But before a debate, it seems to me, some clarification of your position will be necessary.
 You condemn silver basis trading as „usury” in no uncertain terms. It would logically follow that trading the corn basis is also „usury”. And so is selling corn futures contracts with the intention of liquidating the commitment before expiry by purchasing an offsetting futures contract. Furthermore, lending silver at any other than zero interest is usury. Would you agree?
 The meaning of the word „usury” has gone through many a significant change since Biblical times. To a large extent, Protestantism has triumphed over the Catholic Church in the 16th century thanks to its relaxed view of usury.  Even the arch-conservatives of the Church reversed themselves, somewhat belatedly, in the 19th century, when they instructed confessors not to disturb penitents who admit to charging or paying ”reasonable” interest. Earlier, the scholastic fathers were way ahead of their contemporaries when they deemed discount on commercial bills of exchange as conceptually very different from interest and, as such, admissible. Foreign exchange trading was generally exempted from charges of usury, and provided a handy loophole to people wanting to escape from the clutches of the Inquisition. A clever way to get around canonical and secular prohibition of mortgage interest in the Middle Ages was the „rent charge contract”, under which the right to rental income from land holdings and buildings could be bought and sold without disturbing ownership. Religious orders prospered through trading rent charges.
 There are other grey areas. For example, if silver is used in a profitable enterprise, but is withdrawn by the owner in order to lend it to a friend in need, there is an opportunity loss. Is the asking for compensation an instance of usury? Or another: is it usury if a doctor charges his patient for therapy involving silver?
 Another area also needs clarification. Obviously, you are very vocal in your criticism of the short interest in the futures markets, while your criticism of the long interest is muted or non-existent. As you know, a debate is raging in Washington about the immorality of the long positions in energy and food-related futures contracts (see Reference below). Your wholesale condemnation of the futures markets will not solve the problem. Although it would put you in the same boat with Senator Joseph I. Lieberman of Connecticut, but don't forget, he may next propose legislation to check the activities of people who own more than, say, 100 ounces of silver. He could blame silver investors for the collapse of the dollar and, as such, silver hoarding could be declared against public policy.
 Finally, I have just been reading an interesting news item in a British daily, reporting that European airlines could weather the supply-shock of aviation fuel better than their American counterparts, because they have been trading the oil basis. The article mentions Lufthansa by name as one airline which has put on hedges covering 80 percent of its fuel needs, and right now is flying its planes on oil costing only $70 per barrel, or about one half of the going price. In comparison, American airlines have hedged an average of 20 percent of their needs only. Question: is Lufthansa guilty of usury?
 I am respectfully asking you to post this letter on your Silver Stock Report.
 Thank you for your cheerful cooperation. With friendly greetings,
 Yours very sincerely,

 Antal E. Fekete
 Gold Standard University Live

Reference. A Bull Market Sees the Worst in Speculators, by Diana B. Henriques, NYT June 12, 2008.

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To: Jason Hommel
Re: Primer on Usury, Silver Stock Report, June 12, 2008.
Date: June 14, 2008.

Dear Jason,

Fekete:  Thank you for your civil rejoinder to my piece Putting Loin-Cloth on the Naked Bogeyman.

Jason:  Thank you for responding!

Fekete:   I welcome this opportunity for a high level discussion on the basis.

Jason:  I also welcome the opportunity to discuss usury and basis.  But let's remember that the original topic was whether the silver shorts are naked, or not.  And you did not address this issue in your reply.  I, and a few others, are wondering whether you have been convinced on this point.  Specifically, do you have any industry information that shows that the shorts are not naked, other than theory?

Fekete:   Please consider this as my acceptance of your challenge. I am looking forward to this debate and I am willing to abide by the verdict of an informed public opinion beforehand, even if it rules against my position. But before a debate, it seems to me, some clarification of your position will be necessary.
 You condemn silver basis trading as „usury” in no uncertain terms.

Jason:  Condemn?  Yes, I have.  I identify silver basis trading as usury.  Yes, I advice against it, perhaps, would be a better way to put it, than "condemn".  I think I point out more risks than you do, specifically, that trusting future promises can be dangerous if they result in default if the silver shorts are naked.  There are many other problems and risks that I have identified in my essays, here:

I Don't Trade Futures April 4, 2008
The Moral Failures of the Paper Longs Jan 22, 2003

Fekete:   It would logically follow that trading the corn basis is also „usury”.

Jason:  I think so, yes.

Fekete:  And so is selling corn futures contracts with the intention of liquidating the commitment before expiry by purchasing an offsetting futures contract.

Jason:  I think so, yes.

Fekete:  Furthermore, lending silver at any other than zero interest is usury. Would you agree?

Jason:  I think so, yes.  People who fail to understand freedom fail to understand that if lending ought to be at 0 interest, lenders have the freedom to not lend at all, if they so choose.  Or to make investments, instead of lending, if they choose.  About half of my portfolio is in silver stocks, for example.  And I typically sell companies if they start borrowing and hedging production.

Fekete:   The meaning of the word „usury” has gone through many a significant change since Biblical times.

Jason:  Yes, I agree men have distorted the word, but that the Bible is clear about what the word means, since it defines its own usage of it quite clearly.  Usury includes any interest at all, any increase on a loan.

Leviticus 25:36, "Take thou no usury of him, or increase:…" (KJV)


Fekete:  To a large extent, Protestantism has triumphed over the Catholic Church in the 16th century thanks to its relaxed view of usury.  Even the arch-conservatives of the Church reversed themselves, somewhat belatedly, in the 19th century, when they instructed confessors not to disturb penitents who admit to charging or paying ”reasonable” interest. Earlier, the scholastic fathers were way ahead of their contemporaries when they deemed discount on commercial bills of exchange as conceptually very different from interest and, as such, admissible. Foreign exchange trading was generally exempted from charges of usury, and provided a handy loophole to people wanting to escape from the clutches of the Inquisition. A clever way to get around canonical and secular prohibition of mortgage interest in the Middle Ages was the „rent charge contract”, under which the right to rental income from land holdings and buildings could be bought and sold without disturbing ownership. Religious orders prospered through trading rent charges.

Jason:  I've written an essay that I've only published to my paying subscribers, called "Why banning usury won't work."  While I condemn usury, I would never advocate for banning it.  People need to choose, voluntarily, to not be deceived by it, in my opinion, through proper understanding of what it is, and its nature, in order to understand that there are rewards and incentives if we obey the call in Revelation 18:4, "Come out of her, my people, that ye be not partakers of her sins, and that ye receive not of her plagues."  I note it does not say to destroy the harlot, nor does it say to gain the power of the law to ban the practice of the harlot; instead it says to not imitate the harlot, to not do what she does.  It also takes a certain degree of Biblical scholarship and discernment to understand that the harlot practices usury--this is not a universally held viewpoint, although many do share it.  

Fekete:   There are other grey areas. For example, if silver is used in a profitable enterprise, but is withdrawn by the owner in order to lend it to a friend in need, there is an opportunity loss. Is the asking for compensation an instance of usury?

Jason:  Absolutely, yes.  The Bible is very clear that lending to poor people, for the purpose of extracting usury, is not allowed by God. 

Leviticus 25:35 And if thy brother be waxen poor, and fallen in decay with thee; then thou shalt relieve him: yea, though he be a stranger, or a sojourner; that he may live with thee.
36 Take thou no usury of him, or increase: but fear thy God; that thy brother may live with thee.
37 Thou shalt not give him thy money upon usury, nor lend him thy victuals for increase.

Fekete:   Or another: is it usury if a doctor charges his patient for therapy involving silver?

Jason:  I don't see how that would be usury.  Paying for a service, or paying once, more than the value of the silver, for a certain form of silver, is not usury.  That's a purchase, a trade.  I don't even see any similarities here to usury, so I'm really blind as to why you would ask this. 

Fekete:   Another area also needs clarification. Obviously, you are very vocal in your criticism of the short interest in the futures markets, while your criticism of the long interest is muted or non-existent.

Jason:  I'm sorry I've been neglectful of that, in your view.  Obviously, you are reading my work.  I've tried very hard to tell people to not play the futures markets, and I do criticize the paper longs rather consistently, in my own view.  I criticize anyone who trusts any form of paper promise of silver, and I always advocate that people get physical silver and take delivery of real silver.  I thought I was rather consistent on this, and I'm sorry if my message has not been clear.

I suppose you were not getting my message, because in my head, it's the same thing.  If I warn that the shorts cannot deliver because they don't have the silver, then it logically follows that it's to the longs that they cannot deliver, and it's the longs that are being deceived.  I thought I was quite clear even in my last essay on why I would not go long in the futures contracts for silver, and not even buy options, no matter how much leverage there is, no matter how much the paper gain could be, because I don't trust that they have the silver to deliver.

As you know, a debate is raging in Washington about the immorality of the long positions in energy and food-related futures contracts (see Reference below).

Jason:  It is, indeed, a very interesting debate.  People are now trying to make money in grain, by buying grain, to protect themselves from inflation.  Thus, paper inflation is starving the world, as a "by-product", and yes, that is, indeed, a moral issue.  The beauty of silver and gold, of course, is that you cannot eat them.  Thus, if their prices go up, nobody starves.  In fact, if silver and gold are money, and if their prices go up, then by definition, the price of everything else is going down. 

Would it be better to kick the speculators out of the grain markets, and thereby, tell them that only gold and silver are the best places to speculate?  I don't think so.  Higher prices for grains are the only thing that can create the economic incentives for more planting and farming.  And the world's grain stocks are precariously low.  Things could get much worse.  But I think the root cause is paper money, and futures contracts which tend to suppress the prices of the underlying commodities.

Our paper money economy creates very odd misallocations of wealth; as you know that's the problem with inflation, it creates a false boom, and people invest in the wrong things, like perhaps not enough farming!  The problem with paper money is that it creates too much false buying power, and thus, if some people are bidding up grain prices too high, maybe that does need to be stopped?  The difficulty is in determining a "just" price; only the free market, the spot market, can do that, and only in a world without paper money, since paper money is fraud, and not compatible with free market principles.

Silver and gold should be traded for grain directly, and only at spot exchanges, physical metal for physical grain; that would be the free market in action, with much less monetary fraud.

The Bible does say that both silver and grain are money, and also, that hoarding grain for monetary gain is wrong, on a moral basis.

 Proverbs 11:26 He that withholdeth corn, the people shall curse him: but blessing shall be upon the head of him that selleth it.

Fekete:  Your wholesale condemnation of the futures markets will not solve the problem.

Jason:  I think it's the only thing that can even come close.  If people stop trusting false paper money promises, and start buying real silver and gold as money, it will actually balance out the many imbalances in the world economy.  Only the free markets can solve the problem of scarcity the best.  Usury is contrary to all free market notions, since it requires the use of force, to enforce the contracts when people default.  Usury also ends up enslaving people, and a slave economy is the exact opposite of a free market economy.  A slave economy is pure communism.

I'm sure you can come out with stories about how, in the past, farmers who sold grain at harvest time for specie of gold and silver created all sorts of imbalances; but I think that's more of a function of lack of available grain storage space, than anything else.  Grain stores safely for up to 20 years, and a wealthy and productive society should have a store of grain to protect against times of famine which can come in any year.   Today, the world has become impoverished in grain due to paper money and futures markets, not for lack of grain storage space.


Fekete:  Although it would put you in the same boat with Senator Joseph I. Lieberman of Connecticut,

Jason:  No, he and I are as far apart as night and day.  Joseph is a leftist, communist, compared to me.  We are on opposite sides of the political spectrum.  The spectrum I'm talking about is not communism on the left, and fascism on the right.  My spectrum is totalitarianism on the left (including fascism), and free market Biblical Capitalism on the right, which is mostly libertarian, and full of liberty and freedom.

Fekete:  (continues in mid sentence) but don't forget, he may next propose legislation to check the activities of people who own more than, say, 100 ounces of silver. He could blame silver investors for the collapse of the dollar and, as such, silver hoarding could be declared against public policy.

Jason:  The only thing that can protect you against such public policies, is hoarding silver!  Governments tend to collapse after they shut down the markets, because then, people can't eat, and they riot, and start a revolution which topples the government.  Given that grain stores the world over are so low, we may see this soon.  And the best protection is silver and food stores, for yourself.

Fekete:   Finally, I have just been reading an interesting news item in a British daily, reporting that European airlines could weather the supply-shock of aviation fuel better than their American counterparts, because they have been trading the oil basis. The article mentions Lufthansa by name as one airline which has put on hedges covering 80 percent of its fuel needs, and right now is flying its planes on oil costing only $70 per barrel, or about one half of the going price. In comparison, American airlines have hedged an average of 20 percent of their needs only. Question: is Lufthansa guilty of usury?

Jason:  Worse!  It's bad enough that they are squeezing some helpless sap out there and paying them the less than the free market price of oil (the spot price) through the use of futures contracts, which have enslaved some poor supplier to this hapless fate.  But what is worse is the poor economic understanding of Lufthansa that results in them passing on these uneconomic and unsustainable savings on to their customers to gain some sort of non-existent "customer loyalty", which will quickly vanish once Lufthansa has to start paying the true economic cost of oil, and raising fare rates accordingly.  Or what could be worse than Lufthansa than trying the same trick, and locking in oil at $130/barrel, while oil prices plummet?  How would they get their low price seeking customers to pay up when all their competitors would be paying less?  As it stands, the crooks have the advantage, and it is an unfair one, in this case, and it's leading to the bankruptcy of other airlines who cannot compete on price!  But it's working to the disadvantage of Lufthansa right now, as they are be like a nation with tarrifs competing on an uneven field, but failing to make the necessary increases in operating efficiency to compete on a level playing field.  So in the long run, Lufthansa will suffer.    

Fekete:   I am respectfully asking you to post this letter on your Silver Stock Report.
 Thank you for your cheerful cooperation. With friendly greetings,
 Yours very sincerely,

 Antal E. Fekete
 Gold Standard University Live

Reference. A Bull Market Sees the Worst in Speculators, by Diana B. Henriques, NYT June 12, 2008.

Jason:  Thank you for your response which contained many questions.  I'm sure my readers will appreciate this exchange.  Would you do me the return favor and answer the following questions?

1.  Have you changed your mind on how much silver might be sold short naked?

2.  Were you aware that the CPM Group's statistics that show that 'On page 16, the yearbook lists Estimated Silver Inventories in London and Zurich at about 75 million ounces for 2006."

3.  Were you aware that the CPM Group's statistics that show tha the LBMA trades 30 billion ounces of silver per year?

4.  Can you understand or explain how they can trade 400 times more silver than they have, in a single year, without having naked short positions?

5.  Were you aware that Ted Butler found a major brokerage house to be admitting that "they were not doing anything unusual by charging storage on metal that didn't exist, as this is a widespread industry practice."

6.  What would you estimate to be the risk of default in the silver futures markets in the year 2008?  2009? 2010?  Or anytime in the next 10 years?

7.  Has this discussion or my essay below helped your understanding of usury?  Do you understand my position on usury better?

8.  Finally, I apologize for these last questions for how they sound, but I wonder about motives. Are you making an apology for usury, as I thought you were against it? Have you now, or have you ever, worked in the banking industry or taken any money from any banking establishment or any government?

Thank you. 

Below, is my essay that is now overdue, and relevant to this discussion:

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Why Banning Usury Won't Work


One of the great problems of mankind is to figure out how governments ought to direct, or administer, proper moral guidance for other people.  While some people seem more capable of following the universally recognized moral guideline to treat others as you yourself want to be treated, the problem is what to do about people who are totally selfish, and only want others to treat them as they demand.

From the days of Israel's first king, Saul, the office of the king and the prophet were separated--the prophet was not supposed to be the king, and the king was not supposed to do the duties of the prophet.  The concept of an earthly King was from people who were rejecting the King in Heaven. 

As I learn more and more about the Bible, it seems every sin is related.  The action of turning to an earthly King for security is related to adultry, in that the people reject the King of Kings, Jesus, for an earthly king.  It is also like idolatry, to idolize a king, or government, instead of God.

It seems fairly easy for society to set up laws against murder and theft, and to prosecute those who commit such crimes (even if they can't catch all such criminals).  Prosecution of those crimes seems to work well.  Capital punishment does deter murderers, although there is much debate about that, too.

But it seems much harder to figure out what to do about many other societal problems, such as excessive use of drugs & alchohol, sexual immorality, and gambling.  In those cases, prohibition and prosecution don't seem to work.  But rather, people need a strong moral fiber in themselves to avoid such temptations. 

But why does prosecution against those things seem to result in more crime and unintended consequences?  Perhaps it's because in those "crimes," there is no real victim who can testify or press charges, since the actions taken are consentual, or mutually agreed upon.  Further, those practices primarily hurt the ones who engage in them. 

Similarly, throughout history there has been a profound difficulty in trying to figure out what to do about the problem of usury, or lending at an interest rate.  Sometimes nations have tried to set limits on what is "excessive" and thus "unlawful" usury.

Further, those who borrow and lend do so upon mutual agreement, consentually, and it can be difficult to determine who is the victim. 

Since interest rates today are below the real inflation rate, then lenders are the current victims!

Borrowers, if they think they can make money borowwing, will borrow. 
Lenders, if they think they can make money lending, will lend. 

And really, wouldn't it take the utmost hubris to try to stop them by use of force?

Sometimes, borrowers are better off, and sometimes lenders, and even further, sometimes they both come out ahead in the transaction.

Peculiarly, the Bible does not prohibit lending at interest.  It only prohibits lending at interest to your fellow Israelites!  Even more peculiar, the Bible is filled with directions for specific punishments for many specific crimes, but it does not include a specific punishment for what to do about those who violate this statute, and lend at interest to their brothers!  Even more peculiar, there appears to be a blessing associated with those who actually do lend at interest to other nations: they will end up ruling the nations!

Deuteronomy 15:6 For the LORD thy God blesseth thee, as he promised thee: and thou shalt lend unto many nations, but thou shalt not borrow; and thou shalt reign over many nations, but they shall not reign over thee.

Therefore, lending at interest is a rather peculiar crime if it leads to the blessing of "ruling many nations". 

But on the other hand, for those who would rule the world, they would merely attain the position that God has reserved for himself.  Jesus asked:

Mark 8:36 For what shall it profit a man, if he shall gain the whole world, and lose his own soul?

At various times throughout history, nations have prohibited lending at interest, and/or they have also expelled Jews from their nation.  And that never seems to work, either.  If capital is treated badly, it tends to flee.  And capital flows to where it is treated best.

God says to lend money at zero interest.  Thus, God's preferred, or prescribed interest rate is zero.  Why?  Let's see if I can explain it:

Today, the typical interest rate is below the true inflation rate.  In other words, "real" interest rates are negative, or below God's rate.  Thus, lenders are losing money as bonds cannot keep up with the inflation rate.

Today, borrowers can borrow money at negative real interest rates; thus, borrowers are literally being paid to borrow money.

Thus, money is flowing towards those who treat money best -- towards borrowers.

Unfortunately, most borrowers put their borrowed money into overvalued housing, so that's not working out so well for them right now, either. 

Mathmatically speaking, when gold and silver are used as money such as they were in the United States for over 100 years from the 1800's to the early 1900's, there was constant, mild, deflation, of about 1% per year, or less.

The maximum compounding growth rate for the maximum amount of wealth, the rate at which you can grow a gold coin into all the gold in all the world if you had as much time as all of humanity, is about 1/4 of 1%.

Thus, I suppose that those two rates cancel each other out, and God's "zero rate" is best.  IE, if you get your gold back in an era of deflation, and charge zero interest, you actually make 1%, not to mention helping out your fellow man.

But what happens to those who attempt to prohibit what God allows?  And remember, God allows lending, even at an interest rate if you are lending to a stranger.

Let's look at a different example, to consider prohibition in the context of alcohol.  Jesus's first miracle was to create wine at a wedding where they ran out of wine.  If you have ever been to a party that ran out of alcohol, you know you are at a wild party.  Further, the chief steward of the party said, "Everyone serves the good wine first, and then the cheaper wine when the guests have become drunk. You have kept the good wine until now!" 

Now, if you are not a wine drinker, let me instruct you.  Bad wine tastes bitter, and has a strong flavor of alcohol, yet is rather "weak" at getting you drunk.  In contrast, good wine not only tastes better, but also, is not so bitter, tastes less of alcohol, is stronger, and gets you drunk faster, and costs a lot more.  That's the kind of wine that Jesus made.  But furthermore, if you are drunk, you can't tell much difference, and that was the point of the chief steward of the wedding.  In other words, Jesus made very strong wine for a wedding party that had been drinking until drunk, wine that tasted good and was easy to drink, and for people who were so drunk already that they could hardly tell the difference between good strong wine and the bad stuff.

So, it seems that while Jesus created wine, and gave it to people who were drunk, he does not approve of drunkenness!  Very peculiar!

So, while I can't condone drunkenness, neither can I condemn or prohibit strong wine, that Jesus, Himself, created, to give to those who have already had too much to drink!

Alcohol prohibition in the 1920's in the U.S. didn't work.  Prohibiltion increases desire.  And you cannot eliminate market demand by a prohibition law that therefore increases it.

Prohibition increases law breaking, because while bootleggers are breaking one law, they don't mind breaking others, such as laws against murder and theft; the easiest laws for civilized men to agree upon.

Prohibition vastly increases the profit margins for those who are criminally inclined, and thus economically rewards those who are criminally inclined to commit murder and theft to retain their criminal power.

Prohibition increases government corruption, as excess profits that eliminate competition due to prohibition can be used to bribe judges to avoid prosecution, and can also be used to bribe legislators who make the laws.

Prohibition is like a government granted monopoly of a lucrative and very profitable business to the criminally inclined!

In the aftermath of Prohibition, economist Ludwig von Mises wrote, "Once the principle is admitted that it is the duty of government to protect the individual against his own foolishness, no serious objections can be advanced against further encroachments."

Similarly, I think that prohibition against usury cannot and will not ever work.

Prohibition of usury would encourage and economically reward "usury criminals" who would easily corrupt the government, who would not be discouraged by an unjust and unBiblical law prohibiting the lending of usury to strangers, which the Bible allows.

I'll echo Mises, "Once people use the argument that the government needs to protect people from their own stupidity, then that same argument can be used to justify all kinds of government tyranny."

Usury may be immoral and may lead to slavery, but it would be a crime ten thousand times worse to try to ban usury, and if you can understand why, then you can understand the nature of God-given freedom.  Economic freedom means the freedom to fail.  If we ban people from failing, we have communism and totalitarianism.

If usury is bad, and I think it is; then it's best to simply avoid it voluntarily, freely.  It does seem to help, however, when you can see the fools heading towards their own folly beforehand, as it does seem to help in making predictions about the future, which can be rather rewarding in the business world.

See my prior articles:
Freedom from Usury Jan 23, 2004
http://www.silverstockreport.com/essays/Freedom_from_Usury.html
Usury Enslaves Jan 19, 2004
http://www.silverstockreport.com/essays/Usury_Enslaves.html
 

==============



Sincerely,

    Jason Hommel

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