THE DOLLAR MILKSHAKE THEORY - PART II

Dollar Milkshake – The Theory

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1. INTRODUCTION: A NEW MONETARY WORLD ORDER?

• Where are we with markets and the US dollar?
• Currencies are under pressure, debt is mounting, and monetary orthodoxy is breaking down
• Brent Johnson’s Dollar Milkshake Theory offers a good if contested framework to understand what is happening and what may come next
• This piece examines the mechanics, the risks, and the long-term investor implications of a global system that appears to be slowly unravelling
• The Dollar Milkshake Theory is not the only framework for understanding the macroeconomics of where we are - we will finish with a reference section.

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2. HOW THE CURRENT SYSTEM WORKS: THE DOLLAR AT THE CORE

• Most global trade and finance still flows through the US dollar. It is the world’s reserve currency
• Many countries borrow in dollars, but only the US can print US dollars
• Example, look at the Asian Financial Crisis, the Tom Yum Gung crisis of 1997
• In times of global crisis, liquidity (which is the ability to buy and sell an asset without changing its price) dries up, and everyone scrambles for dollars
• The US Federal Reserve, the Fed, the US central bank, has the unique power to “unclog” the system by creating and distributing dollars via swap lines (agreements between central banks to exchange currencies temporarily, to provide its local banks with foreign currency, usually dollars) to ease liquidity shortages during financial stress, ie international lending.

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3. WHY THIS CREATES A STRUCTURAL IMBALANCE

• When the Fed prints to support the system, non-US countries receive short-term relief but accumulate long-term dollar-denominated debt
• Over time, this debt becomes unpayable, especially if their own currencies weaken
• The irony is that the Fed solves today’s crisis, but seeds tomorrow’s debt trap
• And only the US, not China, not the IMF, nor any other body, can inject true base-money (real dollars) liquidity into the dollar system.

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4. WHY GOLD AND ALTERNATIVE CURRENCIES ARE BACK IN FOCUS

• Countries like China, Russia and BRICS allies are quietly building gold reserves
• Why? Because a gold-backed or commodity-linked currency would offer insulation from the dollar
• But creating such a system requires trust, convertibility, and scale
• It also comes with a trade-off: less ability to manipulate monetary policy - Gold-backing constrains monetary expansion because of the promise to repay in gold, and limits fiscal over-spendng.

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5. WHAT HAPPENS WHEN DEBTS CAN’T BE REPAID?

• If emerging economies default on dollar debts, they may face capital flight, inflation, or a currency crisis
• The Fed and IMF can intervene, but only if there is the political will, and only if all the players remains cooperative
• Defaults or restructurings harm US banks, bondholders, and the Fed itself, so there's a limit to indifference
• But each bailout weakens confidence in the dollar as a neutral global asset.

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6. WHAT HAPPENS IF THE SYSTEM BREAKS FOR GOOD?

• A terminal crisis would see countries move away from the dollar system altogether, as might be happening at the moment
• China could offer loans in yuan, gold, or in dollars from its own holding of dollars (it cannot really leverage them, it relies on reserves and swap lines) or a new synthetic currency backed by commodities, which seems unlikely
• But this transition would be slow, fragmented, and fraught with geopolitical tension – even war
• A breakdown of US dollar dominance could disrupt trade routes, supply chains, and global capital flows.

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7. WHAT TO WATCH FOR: SIGNALS OF AN APPROACHING SHIFT

• Rising gold purchases by central banks, especially BRICS
• Growth in bilateral trade bypassing the dollar
• Use of gold or oil to settle trade (e.g. Russia, Iran, China deals)
• Expansion of CBDCs (Central Bank Digital Currencies) outside the Western system
• US sanctions being countered with alternative financial payment systems & infrastructure (e.g. China’s CIPS, Russia's MIR vs SWIFT).

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8. LONG-TERM INVESTOR STRATEGIES

A. Core Protection:

• Hard Assets: Physical gold (better than silver ), precious metal ETFs like SGLN or GDX
• Resilient currencies: Swiss franc, Singapore dollar, Norwegian krone
• TIPS and other inflation-linked bonds in developed markets.

B. Asymmetric Bets:

• Exposure to gold miners g GJGB and commodity producers
• Selective exposure to emerging markets with commodity surpluses and stable monetary regimes (currency weakening would halt), such as:
• Chile (copper, lithium)
• Indonesia (nickel) - currency continually weakening
• UAE (petrodollars)
• Brazil (soy, iron ore)
• Singapore (financial services hub, sound monetary base).

C. Diversify Across Jurisdictions:

• Reduce reliance on any single currency or country
• Use multi-currency bank accounts, and if feasible, store wealth across legal jurisdictions.

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9. CAVEATS AND RISKS

• Moving away from the dollar is not easy. Dollar liquidity is still essential.
• Gold-backed currencies offer stability but limit monetary and fiscal flexibility – which can be fatal in downturns
• The transition, if it happens, will be disorderly
• War, capital controls, sanctions / tariffs, or expropriations will likely accompany the change.

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10. CONCLUSION: THE ROAD AHEAD

• The Dollar Milkshake Theory is not prophecy, but it exposes real fault lines in the global financial system
• As the dollar pulls in liquidity during crises, other countries are left increasingly vulnerable each time
• Eventually, the world may tire of this asymmetry, but replacing it will take a great deal of trust, time, and great coordination
• A smart investor watches the signs – and diversifies away, building their choices.

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REFERENCES & MACROECONOMISTS:

• Brent Johnson (Dollar Milkshake Theory)
• Luke Gromen (forestfortrees.substack.com)
• Zoltan Pozsar (Ex-Credit Suisse strategist on post-dollar systems)
• Joseph Wang (Fed Guy – liquidity dynamics and Treasury markets)
• James Rickards (Currency wars, gold and geopolitical finance)
• Lyn Alden (Macro strategy and monetary policy)
• Russell Napier (Financial repression and capital controls)

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