Original author: Xu Chao
Source: Wall Street Journal
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 an irreversible crossroads—no matter which path he chooses, an economic crisis comparable to the 1929 Great Depression is nearly inevitable, differing only in whether it manifests as an asset collapse or the complete erosion of the dollar’s purchasing power.
Wash has made high-profile statements on multiple occasions over the past two months, vowing to bring inflation down below 2% and acknowledging that he has "no magic wand." Yet, his words have not moved price trends; futures markets experienced only brief fluctuations during his speeches before quickly returning to higher levels. More critically, over the past decade, U.S. CPI has been below 2% only twice—1.8% in 2019 and 1.2% in 2020—with a decade-long average far exceeding 3%, indicating that prolonged monetary easing has become deeply entrenched.
Under this context, Wash’s options are reduced to two starkly opposing paths: one is to maintain austerity, burst the bubble, and trigger a "Global Financial Crisis 2.0" (GFC 2.0) more severe than 2008; the other is to return to easing under pressure, securing short-term stability at the cost of a systemic collapse in the dollar’s purchasing power—namely, a "Global Currency Crisis 1.0" (GCC 1.0). Shan judges that, in the face of immense political pressure, Wash is overwhelmingly more likely to choose the latter.
No middle ground: Two paths lead to the same crisis
According to economist aka Shan’s analytical framework, there is no middle ground between GFC 2.0 and GCC 1.0; either outcome will lead to a severe economic recession.
If Waugh maintains a hawkish stance—continuing rate hikes, advancing quantitative tightening (QT), and pushing the government toward budget balance—the multiple asset bubbles, now inflated to dangerous levels, will burst in succession. Unlike 2008, when only the housing bubble collapsed, today we face concurrent AI, real estate, and private credit bubbles, each of which, on its own, exceeds the scale of the 2008 mortgage crisis; their combined detonation will far surpass the Lehman moment.
If Waush repeats Bernanke’s playbook—zero interest rate policy (ZIRP) plus quantitative easing (QE)—under recessionary pressures, monetary overissuance will accelerate the collapse of the dollar’s purchasing power, ultimately leading to a currency crisis. Ironically, Bernanke was awarded the Nobel Prize in 2022 for his crisis response at the time, yet the very difficulties the U.S. faces today are the direct consequences of that loose policy.
Cantillon Effect: Why 2026 Is Different 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 new money does not flow evenly into all assets, but instead enters specific asset classes at different times, creating asymmetric price impacts.
From 2008 to 2020, the U.S. M2 money supply expanded from $7 trillion to $20 trillion, the Federal Reserve’s balance sheet grew from under $1 trillion to nearly $8 trillion, and national debt rose from under $10 trillion to nearly $30 trillion. During this period, stocks, real estate, and bonds surged significantly, while commodity prices moved in the opposite direction—the CRB Commodity Index fell nearly 75% over the decade-long period of monetary expansion.
2022 was the decisive turning point of this cycle. Historically suppressed commodity prices are now beginning to catch up with the accumulated monetary inflation. This means that, solely due to decades of fiscal deficits and artificially low interest rates, the United States is already facing at least a decade of high inflation pressure—and if monetary policy were to spiral out of control on top of this, high inflation could quickly escalate into hyperinflation.
Can Wash follow through on his words?
Current observable evidence suggests that the probability of Wash truly implementing a hawkish policy is extremely low.
The true test will come when the "modern Lehman moment" arrives—when multiple bubbles burst in sequence, the economy plunges into sharp recession, and political pressure to restart ZIRP and QE becomes immense. The question is whether Walsh has the resolve to withstand this pressure and make the politically costly but economically correct choices: raising rates, continuing quantitative tightening, and forcing fiscal consolidation.
aka Shan spoke frankly: he personally believes this probability is "extremely low, almost zero." Inflation is ultimately a policy choice, but in the face of political realities, the more destructive yet more convenient path often becomes the final choice.