Beyond allegations of mismanagement and outright fraud, the collapse of the FTX cryptocurrency exchange reveals a more fundamental problem — the power of speculative manias fueled by central-bank easy money.
Peter Schiff recently appeared on NTD Capital Report to talk about the collapse of FTX, saying ultimately it was the Federal Reserve’s fault. And it is a warning sign for the broader economy.
When FTX filed for bankruptcy, it sent shockwaves through the crypto world. As Mises Institute senior editor Ryan McMaken put it, “FTX’s collapse has exposed just how little due diligence is actually taking place among investors who are apparently willing to put large amounts of cash in whatever place looks like the hottest new thing and promises—without convincing evidence—big-time returns.”
Peter said he wished he had taken a deeper look into Sam Bankman-Fried earlier because he thinks he would have been able to ferret out the fraud pretty quickly. Peter pointed out that he called out Alex Mashinsky (CEO of the crypto lending and staking platform Celcius) for running a Ponzi scheme in a debate. Celcius filed for bankruptcy back in July. SchiffGold analyst Tony called Celcius the “canary in the coal mine” and said FTX was the coal mine — and it just collapsed.
Peter pointed out that Celcius was paying yield on cryptocurrency, as was FTX.
How could you do that? Cryptos don’t generate yield. The only way to generate yield is to take tremendous risk, which is exactly what [Mashinsky] did, except the people who were depositing their crypto didn’t appreciate the risk that was being taken. Of course, they were taking a lot of risks themselves just owning crypto because all of these currencies are basically worthless. They’re not even really currencies. They’re collectible tokens. But pretty soon, nobody is going to want a bitcoin collection, or any of these collections, and the prices are going to implode.”
Some people have expressed sympathy for Bankman-Fried, saying his naivete got him in trouble, and that he wasn’t intentionally trying to defraud people. Peter said he doesn’t know whether Bankman-Fried’s actions were criminal or just the result of gross incompetence and negligence.
But you would think some of these hedge fund managers who invested with him would have done a little bit of due diligence. But this just shows you the way investors will act when they’re drunk on cheap money. So, I would blame the Federal Reserve for a lot of people acting as foolishly as they did. Because maybe he was a kid, but there were a lot of grownups who were giving him money.”
McMaken wrote that the FTX collapse was a canary in the coal mine for the broader economy and that it could foreshadow the fate of other segments in the economy that have been pumped up by the easy money policies of the Federal Reserve over the last decade-plus.
Peter also talked about the overall state of the US economy during his interview, calling it “an absolute disaster.”
Thanks to Fed policy over the last decade or so, we have a gigantic bubble. We never had a real recovery. We just had a financial bubble. And we dug ourselves into a much deeper hole than the one the Fed put us in back in 2008 following the financial crisis that they also created with the same type of monetary policy that is creating the crisis that we are heading for, which is going to be far worse than what we experienced in 2008. Not only is inflation going to get much worse than it already is, but we’re going to have a worse financial crisis than the one we had in 2008. This is going to be the worst recession that the US has ever experienced. It may even be worse than the Great Depression. It will certainly feel worse for most people because in the Depression, people at least got the relief of falling prices. This time, consumers are going to feel the sting of dramatically higher prices.”
So why did we have solid GDP growth in the third quarter? Peter said it was just a function of the big improvement in the trade deficit. While the trade deficit was still huge, it wasn’t as big as it was in the previous quarters.
That was thanks to two factors. One – the strong dollar, which is now reversing. The dollar just had its worse month in 12 years. … So, that’s going to push the trade deficit up. In fact, the trade deficit in November swelled by 10%. It was a huge jump. But the other factor that helped bring down the trade deficit was all the oil that Biden released from the Strategic Petroleum Reserve. Oil companies were able to buy that oil and then export it, and so, that artificially boosted our exports, which improved GDP. But pretty soon, we’re going to run out of the oil in this strategic reserve. There won’t be a reserve left, so we won’t be able to rely on that crutch.”
Peter pointed out that the economic data that came out last week was horrific.
I think we’re going to have a big negative number for Q4 GDP. So, we’re going to end the year on a low note. And I think we’re going to have another negative quarter in Q1 of 2023.”
The host asked Peter what he thought about the big jump in retail sales. Doesn’t that bode well for the economy?
Peter said they’re not really up.
Prices are up. So, if you factor in inflation, retail sales are down.”