Walsh faces only two paths: either detonate a "Financial Crisis 2.0" or ignite a "Dollar Crisis 1.0"?
- Key Takeaway: Economist @akaShan argues that the monetary policy choices facing new Fed Chair Walsh are steering the U.S. economy toward an inevitable crisis: either persist with tightening to prick multiple asset bubbles, triggering a "Global Financial Crisis 2.0," or return to easing, causing a collapse in dollar purchasing power and a "Global Currency Crisis 1.0." The probability of the latter is extremely high.
- Key Factors:
- Over the past decade, U.S. CPI has fallen below 2% only twice (1.8% in 2019, 1.2% in 2020), with the ten-year average exceeding 3%, indicating that the legacy of prolonged monetary easing is deeply entrenched and inflation will be extremely difficult to bring down.
- The market currently faces the simultaneous coexistence of an AI bubble, a real estate bubble, and a private credit bubble—each individually larger than the 2008 mortgage crisis. A simultaneous collapse would far surpass the Lehman Moment in impact.
- Between 2008 and 2020, U.S. M2 expanded from $7 trillion to $20 trillion, the Fed's balance sheet grew from under $1 trillion to nearly $8 trillion, and national debt climbed to nearly $30 trillion.
- The Cantillon Effect shows that during the period of excessive money creation, the CRB commodity index cumulatively fell nearly 75%. Starting in 2022, commodities began a catch-up rally, and the historical accumulation of debt has created at least a decade of high inflationary pressure.
- Walsh has previously stated there is "no magic wand," yet market reaction was muted—futures prices only briefly fluctuated before returning to elevated levels—indicating a lack of market confidence in his hawkish commitments.
- Under political pressure, the probability of Walsh restarting zero interest rates and quantitative easing when the "modern-day Lehman Moment" arrives is extremely high. The author assesses the probability of him executing a truly hawkish policy as "extremely low, even close to zero."
Original Author: Xu Chao
Original Source: Wall Street CN
In the view of economist aka Shan, the monetary policy decisions of the Fed's new chair, Kevin Warsh, are pushing the U.S. economy toward a crossroads with no way back—regardless of which path he chooses, an economic crisis comparable to the Great Depression of 1929 is almost a foregone conclusion. The only difference lies in whether this crisis manifests as a collapse of assets or as the complete disintegration of the dollar's purchasing power.
Over the past two months, Warsh has made high-profile statements on multiple occasions, vowing to bring inflation down below 2% while admitting he has no "magic wand." However, rhetoric has failed to move price trends; futures markets only saw brief fluctuations during his speeches before quickly returning to elevated levels. More critically, over the past decade, U.S. CPI has fallen below 2% only twice—1.8% in 2019 and 1.2% in 2020—with the ten-year average well above 3%, indicating that prolonged monetary easing has become deeply entrenched and difficult to reverse.
Against this backdrop, Warsh's options are narrowed down to two diametrically opposed paths: One is to persist with tightening, puncture the bubble, and trigger a "Global Financial Crisis 2.0" (GFC 2.0) similar to 2008 but with greater intensity; the other is to return to easing under pressure, ultimately trading short-term stability for the systemic collapse of the dollar's purchasing power—a "Global Currency Crisis 1.0" (GCC 1.0). Shan judges that, in the face of immense political pressure, the probability of Warsh choosing the latter overwhelmingly exceeds the former.
No Middle Ground: Two Roads Lead to the Same Crisis
According to economist aka Shan's analytical framework, there is no compromise between GFC 2.0 and GCC 1.0—either outcome will bring about a severe economic recession.
If Warsh maintains a hawkish stance—continuing rate hikes, advancing quantitative tightening (QT), and pushing the government toward a balanced budget—the multiple asset bubbles that have already inflated to dangerous levels will burst in succession. Unlike 2008, which only saw the bursting of the housing bubble, the current environment features a simultaneous AI bubble, a property bubble, and a private credit bubble, each individually larger than the 2008 mortgage crisis in scale. The shock from their combined detonation will far exceed the Lehman moment.
If Warsh repeats Bernanke's playbook under recessionary pressure—zero interest rate policy (ZIRP) plus quantitative easing (QE)—then excessive money creation will accelerate the collapse of the dollar's purchasing power, eventually evolving into a currency crisis. Ironically, Bernanke was awarded the Nobel Prize in 2022 for his crisis response back then, yet the predicament the U.S. faces today is precisely the direct consequence of that easing policy.
The Cantillon Effect: Why 2026 Differs from 2008
The key to understanding this crisis lies in a frequently overlooked concept in monetary economics—the Cantillon Effect. Its core logic is that newly created money does not flow evenly into all assets; instead, it concentrates into specific asset classes at different times, generating asymmetric price impacts.
Between 2008 and 2020, the U.S. M2 money supply expanded from $7 trillion to $20 trillion, the Fed's balance sheet grew from under $1 trillion to nearly $8 trillion, and national debt climbed from under $10 trillion to nearly $30 trillion. During this period, stocks, real estate, and bonds rose substantially, but commodity prices moved counter-cyclically—the CRB Commodity Index fell by nearly 75% cumulatively over the decade-long money expansion cycle.
2022 marked a decisive turning point in this cycle. Commodity prices, which had long been suppressed, began to catch up in order to close the gap with the monetary inflation accumulated earlier. This means that based solely on the historical debt accumulated through decades of deficit expansion and artificially low interest rates, the U.S. already faces at least a decade of high inflationary pressure—and if monetary policy spirals out of control again on top of this, high inflation could easily escalate into hyperinflation at any moment.
Can Warsh Match His Words with Deeds?
The observable evidence so far suggests that the probability of Warsh genuinely executing hawkish policies is extremely low.
The real test will emerge when the "modern-day Lehman moment" arrives—when multiple bubbles burst in succession, the economy plunges into a sharp recession, and the political pressure to restart ZIRP and QE becomes overwhelming. The question is whether Warsh has enough willpower to withstand the pressure and make the politically costly but economically correct choices: raising rates, continuing balance sheet reduction, and forcing fiscal consolidation.
aka Shan is blunt on this point: he personally believes that probability is "extremely low, even close to zero." Inflation, in the final analysis, is a policy choice. Yet in the face of political reality, the path that is more damaging but far more convenient is often the one ultimately taken.
