Analysis: Fed Caught Between Tightening and Easing Dilemma, Dollar Crisis Probability Higher
Taylor Wilson
Economist aka Shan argues Fed Chair Kevin Warsh has only two paths — hawk-mode tightening that detonates multiple bubbles, or a return to easing that detonates the dollar — both lead to severe recession, with no middle ground.
Two paths — why does neither work?
Path one: keep hiking, push quantitative tightening, enforce fiscal discipline. Result — the AI bubble, property bubble, and private-credit bubble burst in sequence.
This means → In 2008 only one bubble — housing — blew up. This time three bubbles of equal or greater size detonate together, dwarfing the Lehman moment.
Path two: buckle under pressure, revert to zero rates and QE. Result — money-printing accelerates the collapse of dollar purchasing power, triggering a "Global Currency Crisis 1.0."
In plain terms = tightening blows up bubbles; easing blows up the currency. Both ends are crises — there is no safe middle ground.
What is the "Cantillon effect," and why does it matter?
The Cantillon effect — newly created money does not flow evenly into all assets but concentrates in specific classes at different times, causing asymmetric price moves — is the key concept for understanding the current bind.
2008–2020: US M2 swelled from $7 trillion to $20 trillion; the Fed balance sheet grew from under $1 trillion to nearly $8 trillion; national debt climbed from under $10 trillion to nearly $30 trillion.
Over the same period stocks, property, and bonds surged — yet the CRB commodity index fell nearly 75%.
This means → Trillions in new money inflated financial assets first, while commodity prices were suppressed for over a decade — a debt that must eventually be repaid.
Where is the turning point?
Aka Shan identifies 2022 as the decisive inflection: commodity prices suppressed for more than a decade have begun to catch up.
Historical debt accumulated over decades alone is enough to generate at least ten years of elevated US inflation.
This reflects a deeper reality — inflation is not a short-term shock but a delayed bill for years of monetary excess. The catch-up cycle has only just begun.
Can Warsh actually hold the line?
Over the past two months Warsh has repeatedly pledged to push inflation below 2%, conceding he has "no magic wand."
Markets are unconvinced: futures dipped briefly during his remarks, then snapped back. In the past decade US CPI fell below 2% only twice — 1.8% in 2019 and 1.2% in 2020 — with the ten-year average well above 3%.
Aka Shan states bluntly that when multiple bubbles burst and a "modern Lehman moment" arrives, political pressure to restart easing will be enormous. He puts the odds of Warsh staying hawkish at "extremely low, approaching zero."
What does this mean for investors?
Aka Shan's core call: the probability of choosing the easing path overwhelmingly exceeds the hawkish path — a dollar crisis is more likely than a financial crisis.
In plain terms = inflation is ultimately a policy choice. Whether Warsh can match his words with action will be the defining test of Fed credibility.
This means → If this thesis holds, the long-term repricing of commodities and real assets is just beginning, while dollar-denominated financial assets face purchasing-power erosion.
Content is for reference only, not financial advice.