--- title: "Warsh Faces Only Two Paths: Trigger \"Financial Crisis 2.0\" or Ignite \"Dollar Crisis 1.0\"?" type: "News" locale: "en" url: "https://longbridge.com/en/news/294932348.md" description: "Protect assets or protect the dollar? Kevin Warsh, the new head of the Federal Reserve, faces a century-defining dilemma with no retreat: tightening will trigger an epic asset crash, while easing will completely erode the purchasing power of the US dollar. Experts assert that, facing multiple bubbles far exceeding those of 2008, he is highly likely to compromise politically and restart liquidity injections, making a hyperinflation crisis comparable to the Great Depression inevitable" datetime: "2026-08-05T08:26:47.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/294932348.md) - [en](https://longbridge.com/en/news/294932348.md) - [zh-HK](https://longbridge.com/zh-HK/news/294932348.md) --- # Warsh Faces Only Two Paths: Trigger "Financial Crisis 2.0" or Ignite "Dollar Crisis 1.0"? In the view of economist aka Shan, the monetary policy choices of Kevin Warsh, the new head of the Federal Reserve, are pushing the US economy toward a crossroads with no way back—whichever path he chooses, an economic crisis comparable to the Great Depression of 1929 is almost certain. The only difference lies in whether this crisis manifests as an asset collapse or ends with the complete erosion of the US 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% and admitting that he has "no magic wand." However, his rhetoric has failed to sway price trends; futures markets experienced only brief fluctuations during his speeches before quickly returning to high levels. More importantly, US CPI has fallen below 2% only twice in the past decade—1.8% in 2019 and 1.2% in 2020—with the ten-year average well above 3%, indicating that long-term loose monetary policy has created burdens that are difficult to reverse. In this context, Warsh's options are distilled into two diametrically opposed paths: **first, persist with tightening to burst the bubble, triggering a "Global Financial Crisis 2.0" (GFC 2.0) similar to but more severe than 2008; second, return to easing under pressure, ultimately exchanging systemic collapse of the US dollar's purchasing power for short-term stability, i.e., "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 is overwhelmingly higher than the former. ## 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 result in a severe economic recession. If Warsh maintains a hawkish stance—**continuing to raise interest rates, advancing quantitative tightening (QT), and pushing the government toward budget balance—the multiple asset bubbles, which have already inflated to dangerous levels, will burst one after another. Unlike 2008, when only the real estate bubble burst, the current environment features concurrent AI, real estate, and private credit bubbles. Each of these, individually, is larger in scale than the 2008 mortgage crisis, and their combined impact upon bursting will far exceed the Lehman moment.** If Warsh repeats Bernanke's script under recessionary pressure—**Zero Interest Rate Policy (ZIRP) plus Quantitative Easing (QE)—then excessive money printing will accelerate the collapse of the US dollar's purchasing power, eventually evolving into a currency crisis. Ironically, Bernanke received the Nobel Prize in 2022 for his crisis management at the time, yet the dilemma facing the US today is precisely the direct consequence of that loose policy.** **** ## Cantillon Effects: Why 2026 Is Different from 2008 The key to understanding this crisis lies in a often-overlooked concept in monetary economics—the Cantillon Effects. Its core logic is that newly created money does not flow evenly into all assets but concentrates into specific asset classes at different times, creating asymmetric price impacts. Between 2008 and 2020, the US M2 money supply expanded from $7 trillion to $20 trillion, the Federal Reserve's balance sheet grew from less than $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 significantly, but commodity prices moved counter-trend downward—the CRB Commodity Index cumulatively fell by nearly 75% during a decade-long cycle of excessive money printing. 2022 marked the decisive turning point of this cycle. Historically suppressed commodity prices are beginning to make up for lost ground to catch up with the accumulated monetary inflation. This means that, based solely on the historical debt accumulated through decades of deficit expansion and artificially low interest rates, the US already faces at least ten years of high inflationary pressure—and if monetary policy loses control further on this basis, high inflation could easily evolve into hyperinflation at any time. ## Can Warsh Match Words with Actions? Currently observable evidence suggests that the probability of Warsh truly implementing hawkish policies is extremely low. The true test will emerge when the "contemporary Lehman moment" arrives—when multiple bubbles burst sequentially, causing a sharp economic recession, and the political pressure to restart ZIRP and QE becomes immense. The question is whether Warsh has sufficient willpower to withstand the pressure and make the choice that is politically costly but economically correct: raising interest rates, continuing to shrink the balance sheet, and forcibly driving fiscal consolidation. aka Shan is blunt about this: he personally believes this probability is "extremely low, even close to zero." Inflation is, after all, a policy choice, but in the face of political reality, the path that is more destructive yet more convenient is often the final choice. ## Related News & Research - [Trump has called Warsh repeatedly since he became Fed chair](https://longbridge.com/en/news/295038015.md) - [Prospects of Tighter Future Supplies Lift Sugar Prices](https://longbridge.com/en/news/295000741.md) - [Bessent defends Warsh, saying markets are going through 'detox' from too much Fed guidance](https://longbridge.com/en/news/294850178.md) - [Good things are coming in smaller packages as household budgets tighten](https://longbridge.com/en/news/294580292.md) - [Sugar Prices Supported by the Outlook for Tighter Supplies](https://longbridge.com/en/news/294850564.md)