Fekete Answers Me & the Debate Continues

(Fekete vs. Hommel continued)

Silver Stock Report

by Jason Hommel, June 18th, 2008

The debate started when Antal Fekete noted that people like Ted Butler and I have warned that there are many entities selling, or shorting, silver who probably don't have it.
Dr. Fekete then wrote: "Putting Loincloth on the Naked Bogeyman" (A Primer on the Silver Basis) on June 11th.
I then wrote: Silver Shorts are so Naked, they've "Gone Wild" on June 12th.
Dr. Fekete asked me several questions about usury, and I wrote: Fekete Questions Me, & Why Banning Usury Won't Work on June 14th.
Dr. Fekete answered my 8 direct questions, and so our debate continues.

Again, 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: "

Part of my delay in publishing this response was that I was disappointed in the quality of Fekete's reply. But I suppose that happens, and that's what a debate is supposed to show. I know a lot of people are enjoying this debate, as it brings a new level of clarity to many issues for many people.

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To: Jason Hommel
Re: Fekete questions me, Silver Stock Report, June 14, 2008-06-15

Dear Jason,

It gives me pleasure to answer your questions as follows. (For reference, Jason's questions are repeated)

1. Have you changed your mind on how much silver might be sold short naked?
1. I have not changed my mind on how much silver might have been sold naked. I find it impossible to reconcile your position with my knowledge of the cash, futures, or option markets. In denying the existence of an inordinate naked short position I am not painting the shorts as angels. I simply represent them as traders who would not shed their loin-cloth lightly. Surely they would lift their long leg when a price decline is imminent, but most of the time theirs is a hedged position. It seems to me that you attribute supernatural power to them, power that they have never had, nor will they ever have. I even grant you that they may not be above cheating. For example, when the crunch comes and they have to deliver, they may refuse, even though they do have the silver. This could happen if the silver price jumped to $100 overnight. There is a difference between naked shorts (by and large a phantom in my opinion), and hedgers who intend to default fraudulently (a realistic possibility). Are you making that distinction?

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."
2. I don't consider the CPM Group’s statistics as authoritative, because it ignores Chinese silver, as well as silver held in monetary form by private parties (a group to which you also belong). The two categories of silver I have mentioned, Chinese silver and monetary silver in private hoards, may be a multiple of that reported by the CPM. Have you ever asked yourself the question whether the silver shortage may be a red herring dropped by con men preying upon the gullible? They may want people hoarding silver to overextend themselves, so that the latter could fall an easy prey to raids they periodically organize. You and I agree that ultimately a huge silver shortage will burst upon the world. Our difference is in the interpretation what it means. You say shortage is due to industrial consumption in excess of production. I say shortage, when it comes, will be due to exploding hoarding demand for silver as a monetary metal, in response to deliberate currency debasement.

3. Were you aware that the CPM Group's statistics that show that the LBMA trades 30 billion ounces of silver per year?
3. LBMA will trade even bigger amounts in due course. It is all a sign of silver reasserting itself as a monetary metal. Such trade would not be possible without clearing instruments, the use of which you condemn on Biblical grounds, unfairly in my opinion.

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?
4. Trading silver through the use of clearing instruments is no proof that naked short positions exist. Obviously, the same silver is changing hands several times during one single trading session. It does not follow that the sellers are naked. At the end of each session the clearing house will cross out matching purchases and sales for the same account, yet what goes into the report is the gross volume figure. Clearly, you must understand the concept of velocity of trading, even if you disagree with the use of clearing instruments. From a fast train another moving more slowly appears to be going in the opposite direction. It is an optical illusion. Likewise, when trading velocity is high, short selling may appear to you as being naked. But this is merely due to the reluctance of the mind to admit that physical silver can be traded faster than the physical conveyance of the metal, thanks to the use of clearing instruments.

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."
5. Yes, I am aware of the out-of-the-court settlement of Morgan-Stanley with its silver account holders. Even if Morgan-Stanley admits that the silver for the holding of which it has charged a storage fee does not exist, it does not mean that Morgan Stanley is a naked sellers of silver. It would be insane not to hedge its short exposure. Bullion banks offer two types of metal account silver to customers. One is a segregated account with the number on the bars registered, for a higher storage fee. For those who do not take Ted Butler’s advice to heart, they offer another type of account, unallocated metal account silver at a lower storage fee. You may or may not be right in assuming that, when the crunch comes, the bullion banks intend to default on the second type of metal account. But you would be kidding yourself if you believed that they could not default on the first type. Call them dishonest if you will, but don’t call them naked shorts, because naked they are not. They may not be „insanely” bullish on silver, but bullish they certainly are. Above all, they are not suicidal as the myth of the naked bogeyman would have us believe. Advice: it is usually a mistake to underestimate the intelligence of one’s adversaries.

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?
6. There are defaults and defaults. We may classify them according as they fall into one of two broad categories: (a) default due to force majeure, (b) fraudulent default. Prototype of the latter was the default of the U.S. government on its domestic gold obligations in 1933, which went a long way to encouraging this type of behavior on the part of other governments as well as private parties. You may or may not be right in assuming that a huge default of this type is in the making. It is anybody’s guess when the perpetrators will spring default on the long interest in silver. Logic may suggest that they will wait until the open interest in silver futures contracts reaches much higher levels, to let the bountiful catch justify the enormity of the fraud.

7. Has this discussion or my essay below helped your understanding of usury? Do you understand my position on usury better?
7. To be frank with you, your answer has not helped me to see merit in your position on usury and on basis trading. If you were consistent, you would not stop at condemning basis trading. You would have to condemn anybody benefiting from its blessings, including yourself. It is hypocritical to condemn usury (as defined by you) while enjoying the multifarious benefits derived from the financing of capital through loans at interest. Not only should you desist from flying in an airplane or from driving a car, both of which were born in sin (to the extent they could not have been developed and produced without what you call usury). You should also refuse to eat food except what you could grow with your own labor (and, by the way, make sure you don’t use a tractor because it was also born in sin). You may be able to buy bio-food in your friendly neighborhood health-store, but you cannot buy food anywhere in the production and distribution of which basis trading has not played an important role.

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?
8. I am not an apologist for usury. I simply observe the fact that the world’s population could not be fed, clad, and sheltered without the capital investments made by our predecessors who were routinely charging and paying interest. Nor could people survive without improvements in the production and distribution of food made possible by basis trading. The patron saint of producers is the Biblical Joseph who successfully deciphered the Pharaoh’s dream about seven rickety cows devouring seven fat ones. His persistent buying of grain for storage saved producers from bankruptcy after a series of bumper crops. But who is the patron saint of consumers? Who will sell grain short at the time of crop failures? The patron saint of consumers, whether we like it or not, is the basis trader whose short selling will allow consumers to purchase their food at reasonable prices at a time of great shortage.

In summary: I don’t think it is reasonable to reject promises to pay, or promises to deliver goods, on grounds that some people may default on some promises some day. Without benefits brought to us by these promises there would be a lot more misery in the world. The answer to the problem of default is a proper legal system that rules out double standards of justice, and ensures transparency of contracts and performance.

Basis trading, far from being an instance of usury is, simply put, trading warehouse space. Our warehouses have only so much space to store goods for future consumption. We must have free markets to buy and sell it which, incidentally, would also regulate warehouse construction. Without basis trading there would be either too little or too much. In either case society would suffer. If there was too little, people would be exposed to shortages and would be forced to pay higher prices. If there was too much, it would amount to a misallocation of scarce resources, and producers may be forced to sell at a loss.

I have studied the theory of interest and the theory of basis trading for nearly four decades. My conclusion is that all rigid interpreters of the Biblical teaching on usury have, sooner or later, relented and agreed that interest determined by the opportunity cost of lending is justified, morally as well as economically. I feel that in due course you, too, will relent.

I have never seen a serious study of the basis that found it morally or economically objectionable. It is untenable to call basis trading usurious, your footnote that banning it would not work notwithstanding.

Yours very sincerely,

Antal E. Fekete
Gold Standard University

P.S. In the January 17, 2008, issue of your silver stock report you took me to task for writing that the monetary metal with the higher specific value is more portable both in space and time. In particular, silver is less portable than gold because it costs more to ship as the unit of value. This fact is one of the main reasons why gold has been, is, and will likely to remain more valuable than silver. You concluded that “Fekete has stuck his foot into his mouth”. Further down in the same article you include your own calculation showing that silver costs about 2.8 times as much to ship as gold which proves my claim. Whose foot in whose mouth?

AEF

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To: Jason Hommel
Re: Fekete questions me, Silver Stock Report, June 14, 2008-06-15

Dear Jason,

Thank you for publishing my letter. In your answer I did not find a clear-cut definition of usury. I am just guessing that you define usury as any and all lending at interest, however low the rate may be. In other words, you reject the Calvinists’ relaxation of the definition of usury, as well as the belated relenting of the Catholic Church, presumably because in your opinion they fail to take the Bible literally. I am not a theologian, but I assume that neither the Calvinists nor the Catholic Church stumbled into their present position, namely, that lending at interest is no usury as long as the rate of interest does not significantly exceed the rate of opportunity loss that owners of borrowed funds suffer as a result of lending, by accident. On the contrary, a lot of high-level study, soul-searching, and critical self-examination have preceded the decision to depart from the rigid interpretation of the usury doctrine. With all due respect I submit that you have to challenge the incomparably greater authority of the protestant churches as well as the Catholic Church, traditional interpreters of the Bible.

Jason: Thank you for challenging me to define usury even better. I think the Bible is quite clear about the definition of usury, it is defined as a loan whereby you have to pay back what was borrowed, plus "any increase" on top of that. Further, there are two restrictions on usury. First, you cannot lend at usury to a brother, but only to a foreigner (non Israelite). Second, all debts are to be forgiven on the 7th year, the Sabbath year, and on the Jubilee year, the 50th year, after 7 Sabbath years, or 49 years. So, even the Bible allows usury, at any interest rate you want!

Now, I don't feel any need to "challenge" the Calvinists or the Catholics, or any other denomination, I feel I only need to understand and apply Biblical wisdom myself, and explain it to others who wish to avoid making costly mistakes. But mostly, I find it convenient to try to study and understand how society is violating the usury laws, and what the results will be, and how I can position myself, and my readers, to benefit from a proper understanding of cause and effect.

I think trying to redefine usury away from "any increase" to "excessive increase" is a distraction which takes one away from the other main issues. First, how do you define "increase"? Second, debts ought to be forgiven every 7 and 50 years, which is a peculiar problem if nobody knows which year is the 7th year, and if nobody can agree what year to designate! Third, how do you define "brother" vs. "foreigner"?

First, to measure increase, you can measure numbers or measure value, and the two are not the same. An interest rate of 7% in an era of 20% money growth M3 inflation creates a negative real interest rate. But even this does not always mean it's good to be a borrower. For example, a 30 year loan for a home, if the underlying asset is overvalued, that obviously creates real risks as nearly everyone in America is now aware as the housing crunch continues. And the other risk is that deflation can hit, turning a negative real rate into a positive one.

Further to this point, in the era of declining gold values, being repaid a gold loan at 1% is woefully under the real interest rate. As gold was declining in value, gold interest rates should have been higher to compensate, but they never did, during the gold bear market. This had the disastrous effect of encouraging gold loans at the bottom of the gold market, which is exactly the wrong time to be a gold debtor. Even further, now that gold is going up in value, even a zero interest rate on a gold loan provides quite a rate of return for gold lenders if they get their gold back, as they should be repaid gold that is much higher in value, as measured in dollars, rates of up to 25%! Thus, we can see that even a "zero interest" loan can have quite a rate attached to it, if we measure increase by value, instead of by number. This is what the Perth Mint is overlooking, in my view, when they say their certificate program gives them in essence a zero interest rate loan. It does not. Their gold and silver certificates represent an increasingly large liability in our new era of rising gold and silver prices (and values) if they do not, in fact, have the silver and gold to back them up.

Next, let me explain what is an "excessive" rate, in my opinion. But before I do, let me give a context. I sincerely believe that most of the world today, perhaps 99.9% of people are illiterate when it comes to understanding usury. It's been said that just over 100 years ago, 95% of the population of the world was illiterate and could not read, mostly because they did not have access to books. Similarly, without access to computers that can calculate the exponential function over long time periods, can mankind really understand the exponential fuction of compounded interest? I've calculated that if you invested an ounce of gold 6000 years ago, at a mere 1/3 of 1% interest, you would own all the gold in the world, all 5-6 billion ounces. Clearly, that is an excessive rate of interest, and no dynasty was ever able to achive it, as we can see that gold ownership is dispersed among more than one person or group. Furthermore, a mere 2.5% rate of interest, from 1 ounce of gold invested 6000 years ago, could compound its way to becoming all the atoms of the universe, all of it would have to be gold, and all of it would belong to one person. Clearly, that is absolutely impossible, you cannot convert even the mass of the earth to gold, let alone all the matter of all the stars. Therefore, it is provably impossible for the largest money to grow faster than 2.5% rate of interest, and if it tries, it will fail, due to natural limits. From this, it logically follows that all the world's gold at 5 billion ounces, worth $5 trillion, proves that the debt of the U.S. at over $9 trillion is both fraudulent in nature, and impossible to repay. So, in the long run, any interest rate at all is excessive, even a zero interest rate loan of gold, if gold prices and values are rising.

Now, it also logically follows that mankind has been far more productive than increasing the wealth of the earth than a small rate of 2.5% over the last 100 years. When the world was on a gold standard, gold values continually increased, and the birthright of the world was a beneficial deflation that rewarded savers, especially as productivity increased, which would lower the costs for nearly everything that man produced. This again proves that zero interest loans of gold do have rewards when the world is under a gold standard, as the gold, when returned, is more valuable than before. In my opinion, man's productivity has increased more than ever in the last 95 years that the world was not on a gold standard, and so all the years that we should have seen continued deflation mean that eventually, that deflation and increase of gold values should eventually be reflected in the gold price. So that means that the finest man's suit should be purchased not for 1 ounce of gold (a historic value), but probably more like only 1/10th of an ounce of gold, once gold returns to it's natural value, given mankind's increased productivity. The finest men's suits today, such as a Kiton, sell for $4000, which implies a gold price of $40,000/oz.

Second, let's focus on why debts were to be forgiven every 7 years. I believe it's because the math of compound interest shows that usury can lead to slavery. If you have a debt that cannot be repaid, the lender is the master. I believe this is why we have income taxes that take away over 50% of people's incomes. For the sake of comparison, a slave paid 50% of his income to his master, and a feudal serf paid only 30%. Perhaps this is why income taxes are lower on those who make less money, they are more like peasant serfs, rather than "house slaves". As a reminder, it was not only debts that were to be forgiven, but all slaves were to be set free every 7 years, according to the Bible. Now, I find it interesting that people used to be able to declare bankruptcy, or freedom from all debts, once every 7 years, although I've heard this has now changed and they are making it harder to do, and I lack detailed understanding of the new bankruptcy laws.

Third, how do you define "brother" vs. "foreigner"? Well, according to my understanding of Christianity, we are to love our enemies, and if so, then I don't think we should enslave anyone through usury. Furthermore, we also have no need to observe the Sabbaths of debt release if we are not in debt, and if we have not indebted other people, do we? In other words, there is no need to set free our slaves every 7 years if we have no slaves to begin with! But that's on a personal level. But what about the legacy debts such as held by the U.S. since World War II, which has always been more in dollars than the value of all the gold in the world? Well, we can see that as gold prices have quadrupled since 2000, and as the debt has not quite doubled in dollars, the value of the debt, as measured in gold has been cut in half. So, instead of owing 5 times as much gold in the world, we now only owe just under 2 times as much gold in all the world. Thus, the rising gold price is destroying the debt, just as the Jubilee is supposed to do. In other words, we can try to ignore the laws of God, which help to show the limits of reality, but people ignore reality at their own peril. Furthemore, what is the end result of successfully enslaving your enemy? There will be blowback, as Ron Paul has warned in this election. If you try to enslave people, people will hate you, when they wake up to their predicament. And the end result is often revolution, and bloodshed, as people continually struggle to be free. Fortunately, there is a peaceful solution. Just buy real physical silver, of course.

Fekete: It gives me pleasure to answer your questions as follows. (For reference, Jason's questions are repeated)

1. Have you changed your mind on how much silver might be sold short naked?
Fekete: 1. I have not changed my mind on how much silver might have been sold naked. I find it impossible to reconcile your position with my knowledge of the cash, futures, or option markets. In denying the existence of an inordinate naked short position I am not painting the shorts as angels. I simply represent them as traders who would not shed their loin-cloth lightly. Surely they would lift their long leg when a price decline is imminent, but most of the time theirs is a hedged position. It seems to me that you attribute supernatural power to them, power that they have never had, nor will they ever have. I even grant you that they may not be above cheating. For example, when the crunch comes and they have to deliver, they may refuse, even though they do have the silver. This could happen if the silver price jumped to $100 overnight. There is a difference between naked shorts (by and large a phantom in my opinion), and hedgers who intend to default fraudulently (a realistic possibility). Are you making that distinction?

Jason: I think you misunderstand the entire nature of banking. Bankers, from since before they were called bankers, practiced fractional reserve lending, which means they are short of the necessary gold to back all deposits. Paper money itself is a form of a naked short position on precious metals. To assert that "they" would never do what is a standard business practice for them, is absurd.   I don't attribute to them any supernatural power, but I think you do. To me, your statment is like saying that a chronic alcoholic who drinks daily can be in charge of all the booze, and not take a sip. That, my friend, would take supernatural power. It would be a miracle if they were not naked short.

Jason: Furthermore, I believe that the nature of irredeemable fiat paper money that cannot be redeemed for silver or gold is that it is exactly like a naked short position in silver.

Jason: Yes, I do expect them to default fraudulently, and not deliver silver when they have it, when they decide its in their best interest to do that, when they decide they want to go long. When they decide to go long, one or more bankers or individuals may take delivery when we are not allowed to, and then let their corporations of limited liability handle the unlimited libility of precious metals debts as precious metals prices skyrocket. That's just one more reason to get physical silver while you still can.

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."
Fekete: 2. I don’t consider the CPM Group’s statistics as authoritative, because it ignores Chinese silver, as well as silver held in monetary form by private parties (a group to which you also belong). The two categories of silver I have mentioned, Chinese silver and monetary silver in private hoards, may be a multiple of that reported by the CPM. Have you ever asked yourself the question whether the silver shortage may be a red herring dropped by con men preying upon the gullible? They may want people hoarding silver to overextend themselves, so that the latter could fall an easy prey to raids they periodically organize. You and I agree that ultimately a huge silver shortage will burst upon the world. Our difference is in the interpretation what it means. You say shortage is due to industrial consumption in excess of production. I say shortage, when it comes, will be due to exploding hoarding demand for silver as a monetary metal, in response to deliberate currency debasement.

Jason: But there are no Chinese members of the LBMA. Nor am I a member of the LBMA. Nor is my silver traded by the LBMA, nor does my silver back any of the positions of the LBMA, so it cannot be included. Yes, I have asked myself why the CPM Group's report is as bullish as it is. I think their bias should be bearish, as they earn consulting fees helping major miners to sell forward their production, and it's not advantageous to do that in a bullish market for silver. But I do note they are not as bullish as me, and I think Jeff Christianson is biased in favor of the futures markets. I have long predicted that silver prices would rise over ten fold, from $5/oz. to over $50/oz. long before 1% of U.S. dollars were ever invested in gold and silver. As it stands, 1% of $14 trillion would be $140 billion. If 1/50th of that went into the silver market (given the 50/1 ratio), that would be $2.8 billion, over 2.8 times as much annual silver demand as exists for 2007. With annual gold mined at 80 million ounces, $137 billion is far more gold than is mined each year.   My paying subscribers, who read my forum, and answer the polls, tend to put about 50% into gold, and 50% into silver.

3. Were you aware that the CPM Group's statistics that show tha the LBMA trades 30 billion ounces of silver per year?
Fekete: 3. LBMA will trade even bigger amounts in due course. It is all a sign of silver reasserting itself as a monetary metal. Such trade would not be possible without clearing instruments, the use of which you condemn on Biblical grounds, unfairly in my opinion.

Jason: In actual fact, 10 years ago the CPM group was trading 75 billion ounces of silver per year. I don't condemn anything on "Biblical grounds", but rather, I condemn it on rational grounds as unwise due to risks that I'm able to explain quite easily, aside from the Bible, based on pure math, rational comparisons of growth rates, comparable sizes, standard industry practices, and open admissions, and freely available market data, none of which you seem to have used in your analysis.

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?
Fekete: 4. Trading silver through the use of clearing instruments is no proof that naked short positions exist. Obviously, the same silver is changing hands several times during one single trading session. It does not follow that the sellers are naked. At the end of each session the clearing house will cross out matching purchases and sales for the same account, yet what goes into the report is the gross volume figure. Clearly, you must understand the concept of velocity of trading, even if you disagree with the use of clearing instruments. From a fast train another moving more slowly appears to be going in the opposite direction. It is an optical illusion. Likewise, when trading velocity is high, short selling may appear to you as being naked. But this is merely due to the reluctance of the mind to admit that physical silver can be traded faster than the physical conveyance of the metal, thanks to the use of clearing instruments.

Jason: I know Dr. Fekete, you are a professor of mathematics, but I'm shocked at your answer. If there are 250 trading days a year, and 30,000 million ounces traded each year, that's an average of 120 million ounces per day, based on deposits of 75 million ounces of silver. So, the LBMA members are trading more silver than the LBMA members have, every day. Clearly, the average person who buys silver in LBMA member accounts holds it for far longer than a day! And if so, then it must logically follow that the LBMA member banks are trading silver that they do not have. And this is the silver traded by the LBMA banks, which is not futures contracts, but bullion accounts at the major banks and brokerage firms listed here: http://www.lbma.org.uk/members_list.html
.

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."
Fekete: 5. Yes, I am aware of the out-of-the-court settlement of Morgan-Stanley with its silver account holders. Even if Morgan-Stanley admits that the silver for the holding of which it has charged a storage fee does not exist, it does not mean that Morgan Stanley is a naked sellers of silver. It would be insane not to hedge its short exposure. Bullion banks offer two types of metal account silver to customers. One is a segregated account with the number on the bars registered, for a higher storage fee. For those who do not take Ted Butler’s advice to heart, they offer another type of account, unallocated metal account silver at a lower storage fee. You may or may not be right in assuming that, when the crunch comes, the bullion banks intend to default on the second type of metal account. But you would be kidding yourself if you believed that they could not default on the first type. Call them dishonest if you will, but don’t call them naked shorts, because naked they are not. They may not be „insanely” bullish on silver, but bullish they certainly are. Above all, they are not suicidal as the myth of the naked bogeyman would have us believe. Advice: it is usually a mistake to underestimate the intelligence of one’s adversaries.

Jason: Yes, I understand that Morgan Stanley could offset unallocated silver accounts with the purchase of a long futures position, and thus, have an offsetting position. However, this would be like a bank that loaned out depositors' money for home loans. If the home loans are not paid, then the bank is in danger of going bankrupt. But it's not just Morgan Stanley who admitted they didn't have the silver. They said, in their defense, that this is a widespread industry practice, and your answer ignores that. The way banks work is that they practice fractional reserve lending, which means that the majority of their silver that they need to back depositors is loaned out, or was sold for cash to invest in other things long ago. As such, it is a naked, and unbacked silver position, by definition. This is not "suicidal", it is standard industry practice, and it will kill them, or result in default, as it always does. There is no "central bank" lender of last resort for bullion positions. The LBMA is all that there is. This is why if you try to get silver from any LBMA bank, they will kick and scream and protest and deny and delay and pursuade and do everything in their power to prevent you from taking delivery of silver, including bluffing, by saying you can get "all you want". I know many investors who were talked out of buying physical silver by their LBMA bankers who write reports about a "surplus" of silver, even as shortages and delivery delays abound!

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?
Fekete: 6. There are defaults and defaults. We may classify them according as they fall into one of two broad categories: (a) default due to force majeure, (b) fraudulent default. Prototype of the latter was the default of the U.S. government on its domestic gold obligations in 1933, which went a long way to encouraging this type of behavior on the part of other governments as well as private parties. You may or may not be right in assuming that a huge default of this type is in the making. It is anybody’s guess when the perpetrators will spring default on the long interest in silver. Logic may suggest that they will wait until the open interest in silver futures contracts reaches much higher levels, to let the bountiful catch justify the enormity of the fraud.

Jason: Many of my readers have asked me for a price when I think the default on silver will happen. I don't think it's dependent on price. It's dependent upon them running out of silver, or refusing to deliver. We may have just hit a default without it being open, when silver hit $21/oz. Orders were refused by major silver dealers, as they "ran out". After they ran out, prices came down. Lower prices calmed down investor buying, which caused the shortages. But the shortages are still with us, and in many places getting worse than ever, with 12 week delivery estimates. Delay is a form of default. Default is when silver cannot be delivered. A delay means silver cannot be delivered. A delay of 3 months in the spot month is default. But these are delays for 100 oz. bars, not in futures contracts.  We may also be witnessing a default by the Perth Mint, despite their protests that all is ok. Bear Stearns said all was ok to the day they blew up! It is my intention to help investors avoid piling into the futures contracts, and to take physical delivery, so that when the big default hits, fewer people will be defrauded.

7. Has this discussion or my essay below helped your understanding of usury? Do you understand my position on usury better?
Fekete: 7. To be frank with you, your answer has not helped me to see merit in your position on usury and on basis trading. If you were consistent, you would not stop at condemning basis trading. You would have to condemn anybody benefiting from its blessings, including yourself. It is hypocritical to condemn usury (as defined by you) while enjoying the multifarious benefits derived from the financing of capital through loans at interest. Not only should you desist from flying in an airplane or from driving a car, both of which were born in sin (to the extent they could not have been developed and produced without what you call usury). You should also refuse to eat food except what you could grow with your own labor (and, by the way, make sure you don’t use a tractor because it was also born in sin). You may be able to buy bio-food in your friendly neighborhood health-store, but you cannot buy food anywhere in the production and distribution of which basis trading has not played an important role.

Jason: This is the worst argument you have made. Just because things have been financed with debt, does not mean that they had to be, and that there was no other way. The other way is direct capital investment, such as buying stock, which involves no usury. Your argument is as fallacious as saying all people who wore cotton clothing were hypocrites for condemning slavery in the south in the U.S. Guess what? We ended slavery, and we have more cotton clothing than ever! It's my argument that usury is a drain on society, that slaves and indebted men are less productive than free men, and that society would be far more productive if people were not deceived by usury, and more people were literate about usury, and wiser about real capital formation.

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?
Fekete: 8. I am not an apologist for usury. I simply observe the fact that the world’s population could not be fed, clad, and sheltered without the capital investments made by our predecessors who were routinely charging and paying interest. Nor could people survive without improvements in the production and distribution of food made possible by basis trading. The patron saint of producers is the Biblical Joseph who successfully deciphered the Pharaoh’s dream about seven rickety cows devouring seven fat ones. His persistent buying of grain for storage saved producers from bankruptcy after a series of bumper crops. But who is the patron saint of consumers? Who will sell grain short at the time of crop failures? The patron saint of consumers, whether we like it or not, is the basis trader whose short selling will allow consumers to purchase their food at reasonable prices at a time of great shortage.

Jason: If you don't want to be mistaken for an apologist for usury, then stop making excuses for it. Capital investments are not usury. Furthermore, the Biblical Joseph did not save producers from bankruptcy. Instead, his capital investments in grain (not basis trading) saved Egypt's consumers, and surrounding nations! Selling short does not provide plenty. Selling short has resulted in shortages in all commodities in the world that are traded on futures exchanges! One of inflation's worst effects is that it leads people into misallocations of wealth, specifically into excessive speculations, rather than production, in a vain attempt to continually stay ahead of the ravages of inflation. Production produces wealth, not gambling.

Fekete: In summary: I don’t think it is reasonable to reject promises to pay, or promises to deliver goods, on grounds that some people may default on some promises some day. Without benefits brought to us by these promises there would be a lot more misery in the world. The answer to the problem of default is a proper legal system that rules out double standards of justice, and ensures transparency of contracts and performance.

Jason: I don't think you understand how lending creates a power structure. The borrower is the servant to the lender. This means that the U.S. writes laws that the lending bankers insist upon, which creates the double standard that you think is fixable. You misplace cause and effect. You cannot have "fair lending" and "fair basis trading" when the government that should be the enforcer is in debt and has a vested interest in maintaining the power to print paper money. The only way to effect meaningful change is to demand delivery of physical silver, because only that can break the power of the dollar, and the power of lenders who lend what does not exist. $9 trillion in paper money that was lent to the U.S. government, never existed. It was fraud from the start, and printed out if thin air, and that's a bigger injustice than any tiny rules changes in the tiny silver markets or futures markets. And remember, the silver market is dwarfed by the larger derivatives markets that are 100,000 times larger.

Jason: In your first essay, you said that no entity could sustain the loss of an unbacked short position in silver in this bull market so far. That's silly, and ridiculous for you, a professor of mathematics to say. If they were naked short 800 million ounces of silver at $5/oz., the entire way up, which is an overstatement, that would only be a $12 loss per ounce to date, which is a paltry $9.6 billion dollars, which is nothing in the world of major finance. Any one of the major LBMA banks could sustain that loss and conceal it quite easily within their balance sheets. Bigger losses than that are being revealed almost daily. The housing crisis alone could reach to $10,000 billion or more, if 1/4 of the value of all homes are lost, and if the value of real estate in the U.S. is about $40,000 billion, as I've read. Which brings me to a point: if you have not already done so, sell your home (if you can) and buy silver (if you can find it). You will buy 10 to 100 times as much real estate after silver goes up and after the housing crash. We sold most of our real estate to buy silver in 2004.

Fekete: Basis trading, far from being an instance of usury is, simply put, trading warehouse space. Our warehouses have only so much space to store goods for future consumption. We must have free markets to buy and sell it which, incidentally, would also regulate warehouse construction. Without basis trading there would be either too little or too much. In either case society would suffer. If there was too little, people would be exposed to shortages and would be forced to pay higher prices. If there was too much, it would amount to a misallocation of scarce resources, and producers may be forced to sell at a loss.

Jason: Wow. We couldn't have a bigger difference of opinion. You have said that basis traders do not even look at the price. Yet free market theory is that the price contains valuable information for all market participants to enable them to make market decisions. The only way to avoid shortages is to note when physical grain supplies are running low, and to raise the price accordingly as supplies run out. Storing grain and selling grain in the spot market is not usury, and is the free market way, and is the only way to prevent shortages, and excesses. Basis trading, by contrast, involves making a future promise to deliver grain, which is like debt, and is like usury.

Fekete: I have studied the theory of interest and the theory of basis trading for nearly four decades. My conclusion is that all rigid interpreters of the Biblical teaching on usury have, sooner or later, relented and agreed that interest determined by the opportunity cost of lending is justified, morally as well as economically. I feel that in due course you, too, will relent.

Jason: I'm not a rigid unthinking interpreter of the Bible. But let's evaluate your rationale. Let's see, in 2003, I made over 300% in less than six months in silver stocks. By your way of reasoning, that justifies an annual rate of lending of over 900%! Surprisingly, Apex silver nearly paid about that when they went short zinc in 2004 at about 70 cents/pound to borrow $250 million. In about a year, they owed over $1.3 billion in a mark to market loss on their zinc at the market price of about $2/lb. Fortunately for them, the zinc price came back to $1.

Fekete: I have never seen a serious study of the basis that found it morally or economically objectionable. It is untenable to call basis trading usurious, your footnote that banning it would not work notwithstanding.

Yours very sincerely,

Antal E. Fekete
Gold Standard University

Jason: I have never seen a serious study on the basis or usury that showed either one to be morally just or economically necessary. But I have read a lot of hot air and fake excuses that are easily refuted.

Jason: In the end, grain trading is nothing like silver trading, because grain spoils, and must be eaten. Silver never spoils, and cannot be eaten. Therefore grain must be delivered before it spoils, and those who go short grain contracts are trying to extinguish thier liability to holding rotting grain by delivering grain into their contracts. This does not take place in the silver markets, where less than 10% of contracts, and often sometimes only 1% of contracts, results in any delivery. Since so little silver futures contracts are converted to delivery, we know that basis trading, like grain basis trading, is not taking place in the silver markets. Your entire theory has fallen completely flat.

Jason: Furthermore to suggest that people are making more money in silver, by basis trading the 1% lease rates, is absurd, since the real money is being made in silver by buying the real physical metal, and seeing an average annual compounding return of 28% or so per year, from $5/oz. to $17/oz. over the last 5 years.

AEF

Jason: In my archives of all articles, I see my Jan 17th report here: Silver Shipping Costs January 17, 2008.

In that report, I found a link to your article, "Exploding the Myth of Silver Shortage" here: http://www.safehaven.com/article-8493.htm

in my article, I quoted you, "The monetary metal with the higher specific value is more portable both in space and time. In more details, the cost of transporting the unit of value as represented by gold is lower. For example, if the bimetallic ratio is 15, then the cost of transporting the unit of value as represented by silver is about 15 times higher."

Doing a word search of "15", I found that my quote of your words was correct. Cost of transport for silver is 15 times higher than gold you say? 2.8 times higher I proved. If 2.8 is "about 15", given that the actual value ratio of silver to gold is actually about 50:1, then I think you need recheck your math.

I don't think there's much left to say to Dr. Fekete at this point.

In the meantime, I'd like to introduce Miles Franklin a major gold and silver dealer. They have 50,000 silver Eagles for sale at $20.50 each if you buy a box of 500.

In spite of a very real shortage of one ounce Silver Eagles in the market place, we can supply up to 100 2008 mint boxes (500 ounces per sealed box) for immediate shipment. The boxes will cost around $10,250 each. The exact price will be calculated at the time of the phone order and based on spot-silver. Call Miles Franklin at 1 800-822-8080 to order. This inventory will sell out fast so if you have been looking for a source of Silver Eagles for immediate delivery, call us this week before they are gone.

Sincerely,

Jason Hommel

In case you miss an email, check the archives:
http://silverstockreport.com/ssrarchive.htm
www.bibleprophesy.org

You can buy silver in lots of 100-500 oz. at my auctions at www.seekbullion.com
Auctions end M-Th, Sat, At 7PM Pacific, but you can place bids anytime, 24/7. Wires only. USA Shipping only.

You can also buy silver at www.momsilvershop.com
Mom will ship overseas, and also in lots of more or less than 100 ounces.

See us also at:
Rocklin Coin Shop
4870 Granite Drive, Rocklin, CA 95677
http://rocklincoinshop.com/