DOLLAR MILKSHAKE - PART I

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Dollar Milkshake – The Theory (Part I)

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The Dollar Milkshake Theory, coined by Brent Johnson, suggests that the U.S. dollar will strengthen significantly as global economies grapple with mounting debt.

1. Introduction: A New Monetary World Order?

Something big is shifting in global finance. Currencies face fresh pressures, debt is piling up, and central banks seem to be tearing up old rulebooks.

Enter Brent Johnson’s Dollar Milkshake Theory, a framework through which we can examine:

• Why the US dollar remains dominant

• How it causes global imbalances

• What might happen when those imbalances become too big to ignore

We’ll unpack the mechanics and risks, reflect on long-term investment lessons, and list macro thinkers worth following.

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2. How the Current System Works: The Dollar at the Core

• Reserve Currency Status
  Most global trade and financial transactions still revolve around the US dollar.

• Borrowed Dollars Everywhere
  Many non-US countries and companies take out loans in dollars, which they must repay regardless of their local currency’s strength.

• Fed’s Unique Power
  Only the US Federal Reserve can “print” base money. In global crises, dollar liquidity dries up quickly as everyone scrambles for the greenback.

• Crisis Example
  During events like pandemics or financial meltdowns, the Fed steps in with “swap lines” or direct lending, temporarily unclogging the system.

Why It Matters:
This US-centric setup creates a powerful but risky cycle. The world needs dollars - the US provides them. But other nations rely on a currency they don’t control.

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3. Why This Creates a Structural Imbalance

• Short-Term vs. Long-Term
  Fed crisis support relieves short-term pain but creates long-term dollar debt in foreign economies.

• Unpayable Debts
  Over time, countries may struggle to earn enough dollars (through exports, tourism, etc.) to repay what they owe.

• Future Crisis Seeds
  Each bailout fixes today’s issues but sows tomorrow’s problems.

• Fed’s Monopoly
  Only the Fed can inject real dollar liquidity. Not China. Not the ECB. Not the IMF.

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4. Why Gold and Alternative Currencies Are Back in Focus

• BRICS and Gold Reserves
  Nations like China and Russia are quietly stockpiling gold to reduce dollar dependence.

• Gold-Backed or Commodity-Linked Currencies
  These can shield a nation from dollar hegemony, but require trust and stable reserves.

• The Trade-Off
  Linking a currency to gold boosts stability but limits a central bank’s ability to manage its economy - it cannot, for example, expand the money supply since each note or coin can be handed in exchange for gold, thus, it cannot control credit.

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5. What Happens When Debts Can’t Be Repaid?

• Emerging Market Defaults
  Dollar-denominated debt plus a weakening local currency leads to default, capital flight, and often hyperinflation.

• Fed and IMF Intervention
  Emergency loans may be offered, but with political strings attached.

• Confidence Shock
  Every bailout reveals cracks in the system, and erodes trust in the “neutrality” of the dollar.

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6. What Happens If the System Breaks for Good?

• Abandoning the Dollar
  In a worst-case scenario, some countries may ditch the greenback altogether.

• China’s Yuan or a Commodity Currency
  A synthetic or gold-backed currency could emerge, but it’s messy and slow.

• Geopolitical Tensions
  Currency upheaval often leads to trade chaos, supply disruptions, even conflict.

• Far-Reaching Fallout
  Collapse of dollar dominance would redraw global trade and finance, with winners and losers.

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7. What to Watch: Signals of an Approaching Shift

1. Central bank gold buying (especially by BRICS)

2. Bilateral trade deals using non-dollar currencies

3. Gold or oil settlements between sanctioned states

4. CBDC development bypassing SWIFT and Western banks

5. Alternatives to US systems (e.g., China’s CIPS, ASEAN's QRIS)

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8. Long-Term Investor Strategies

(A) Core Protection

• Physical gold & silver

• ETFs like SGLN or GDX

• Safe-haven currencies (CHF, SGD, NOK)

• Inflation-linked bonds (e.g., TIPS)

(B) Asymmetric Bets

• Gold miners eg GDXJ and commodity producers

• Resilient emerging markets:
  Chile (copper/lithium),
  Indonesia (nickel),
  UAE (oil),
  Brazil (soy/iron ore),
  Singapore (finance hub)

(C) Diversify Jurisdictions

• Multi-currency strategies

• Own assets in multiple countries to avoid capital controls or confiscation

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9. Caveats and Risks

• Dollar Liquidity Still King
  Despite the talk, the dollar still powers the global system.

• Gold Peg = Policy Handcuffs
  In a recession, gold-linked currencies can be dangerously inflexible.

• Transition Turbulence
  System shifts tend to be bumpy - think wars, sanctions, controls, tarrifs, asset seizures.

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10. Conclusion: The Road Ahead

Brent Johnson’s Dollar Milkshake Theory is not a prediction, rather it is a framework.

Each crisis deepens the world’s dependence on dollars. Eventually, the need for an alternative system may trigger action such as possibly gold-backed, or multi-polar.

But building that system will demand coordination and trust, two scarce resources.

Investor takeaway:
Stay alert. Diversify. Hold real assets. Remain agile.

Warning:

Recent experience since "Liberation Day" suggests that although interest rates may rise, the US dollar is weakening, suggesting that investors are pulling out of the dollar rather than piling in.

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REFERENCES & MACROECONOMISTS TO FOLLOW

• Brent Johnson - Dollar Milkshake Theory

• Luke Gromen - forestfortrees.substack.com

• Zoltan Pozsar - Post-dollar architecture

• Joseph Wang - “Fed Guy”

• James Rickards - Currency wars & sanctions

• Lyn Alden - Monetary macro strategy

• Russell Napier - Capital controls & repression

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HYPER-FINANCIALISATION OF THE AMERICAN ECONOMY - SYMPTOMS, CAUSES, CONSEQUENCES, KEY ISSUES

Preparation

Worth reading "the balancing mechanism" first to make sense of this article. 

This article gives the symptoms, causes and consequences; and explains why hyper-financialisation is important in the lives of people, rich and poor. It doesn't suggest any remedies, other than recommending we all take to the streets in protest - what better time for a Revolution?. That will be for a future article.

Meanwhile, we will finish on a lively discussion and recap of this article.

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Hyperfinancialisation of the American Economy

This post summarises the above Youtube video.

1. The symptoms

This post explores the hyperfinancialisation of the American economy, a condition in which Wall Street's gains have vastly outstripped Main Street's wages. Here are the symptoms - what "hyper-financialisation" means in practical terms.

1. Several metrics are used to illustrate this divergence between Wall St and Main St:

• The hours of labour required to buy one share of the S&P 500 has increased from 25 hours in the 1960s–1990s to a peak of 200 hours after 2008.

• A comparison of the S&P 500 to personal income shows capital (the stock market) pulling away from labour (wages), a reversal of the mid-20th century trend.

• The Buffett Indicator (S&P 500 vs GDP) reflects the same imbalance: GDP has grown 970% since 1980, while the stock market has risen over 5,000%.

• Meanwhile, wages relative to GDP show that the average worker’s income has stagnated or declined in real terms.

• The S&P 500 has grown by 6,876% versus 800% for hourly wages over the same timeframe.

• The Price-to-Earnings ratio has surged, indicating people are paying more for the same future returns.

  
  
  

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2. The causes

• Post-2008 monetary policy: QE, ZIRP, and fiscal deficits inflated asset prices. QE alone involved trillions of dollars created to buy treasuries, corporate debt, and mortgage-backed securities.

• Trade policy and globalisation: Agreements like NAFTA hollowed out domestic manufacturing and led to persistent trade deficits.

• International finance mechanics: The trade deficit must be matched by capital inflows — currently ~$130 billion/month — into U.S. assets, pushing up valuations and creating artificial demand.

  
  
  

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3. The Consequences

• A stark wealth divide: The top 1% own 50% of equities; the top 10% own 93%.

• Labour’s shrinking share of income and declining wage power.

• Asset unaffordability: Housing has become increasingly out of reach, especially single-family homes.

• Government dependency on market performance: Capital gains tax (now 9% of revenue) ties fiscal health to asset bubbles.

• The rise of populism, which stems from this capital–labour divide and contributes to political and social polarisation.

  
  
  

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4. Why this is important

These economic imbalances are the “core issues” in U.S. society, driving everything from rising suicide rates and antidepressant use to deepening political dysfunction.

What to do? The bottom 95% of Americans to unite around economic reform — to reject partisan distractions and tackle the deeper forces of hyperfinancialisation, overvalued currency, and hyperglobalism.

The real divide is not left versus right, but the top 1% versus the bottom 95%.

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5. Listen to a lively discussion 

Aimed at raising awareness of the crisis and human suffering facing ordinary people due to hyper financialisation:

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ACCOUNTING FOR AMERICA'S TWIN DEFICITS

Why the U.S. Trade Deficit Must Always Be Balanced - And What Happens When It Isn’t

"The balancing principle". Not everyone will be able to stay awake till the end of this article, but everyone is capable of understanding this simple double-entry bookkeeping principle, as applied to international finance, called "the structural mechanism". It is fundamental to understanding "hyper-financialisation", that we shall look at in the next post....

03 May 2025

At the heart of international finance lies a simple accounting principle:

The current account and the capital account must balance.

It’s not ideology. It’s not economic theory. It’s just double-entry bookkeeping on a global scale. You cannot get away from the fact that differences between your income and expenditure are stored away on your balance sheet - your net worth. Same for countries' accounts.

If a country runs a trade deficit (it's called a current account deficit, it means the country is importing more than it exports), it must run a capital account surplus. Why? Because the money that flows out to pay for imports must flow back in somehow to balance the books. That "somehow" is when foreigners invest back into the exconomy they soild to, or when the importer country borrows from the rest-of-the-world ie lending, or the importer country dips into its balance sheet reserves, or, if necessary, meaning if noone wants to lend to it or if interest rates are more than it can afford, by recourse to the printing press - creating new money out of thin air, expanding the money supply.

This is why the U.S. trade deficit is always matched by strong capital inflows (or printing). For decades, the rest of the world was happy to sell the goods it manufactures to the U.S. and then recycle those dollars back into U.S. assets: government bonds (treasuries), corporate debt (lending to private corporations), equities (eg the S&P 500), property (buying up real estate in foreign capitols, but above all into U.S. Treasuries.

This process has often been described, rather vaguely, as a “structural mechanism” of global finance. But let’s call it what it is: a global settlement cycle anchored in the U.S. dollar.

The U.S. runs a current account deficit. Foreigners receive dollars. They return those dollars to the U.S. by buying dollar assets. The loop closes. The books balance.

Diagram showing
trade deficit →
balance of payments deficit→
capital inflow to balance the capital account

But what happens when the world no longer wants to hold U.S. assets? This is where the Federal Reserve steps in.

If foreign central banks or institutions stop recycling their dollars back into U.S. debt — or if they even start selling the US debt they hold — then someone has to plug the gap. That someone is the Fed. It buys the debt via Quantitative Easing (QE), creating dollars out of thin air. In effect, the U.S. borrows from itself (the government borrows from the Fed). The balance still holds, but confidence in the system gives way to fears of inflation and currency debasement.

Foreigners don't want US debt - Fed QE cycle filling gap left by foreign capital

This pressure is amplified by a deeper fiscal dilemma. The U.S. government faces mounting obligations — welfare, pensions, and defence — that it cannot politically cut. As debt rises, so do fears of inflation and currency debasement. Foreign investors begin to demand higher yields to compensate for the risk of holding dollar-denominated assets.

But the U.S. government cannot afford high interest rates. A rising cost of debt would crowd out spending and destabilise public finances. The solution? The Fed prints the money — buying Treasuries to suppress yields and keep government borrowing costs down.

Fiscal loop - overspending → market doubt → Fed printing

This creates a circular dependency: the government spends, the market doubts, the Fed prints. Byspending, the Fed creates demand for US bonds. Result: Bond prices rise. As prices rise, yields fall, but confidence in and demand for the dollar weakens and in this way, the system edges just a little bit closer to a crisis of confidence.

This is the danger Brent Johnson highlights in the Dollar Milkshake Theory - and that Ray Dalio uses to explain why the U.S.-led global order is in its late cycle....fewer and fewer want US debt.

The accounting identity works, but the participants are changing. The Fed is buyer of last resort. And if trust in U.S. assets continues to weaken, we may find that the world's capital account surplus returns not to US Treasuries, but to gold, commodities, and hard assets. It's happening, perhaps provoked by Trump's Tariffs, but that could be just a surface explanation....we have to wait and see, there is so much uncertainty! (Wait on the sidelines?)

If confidene is lost, the books will still balance, but the system will not look the same.

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DOLLAR MILKSHAKE PART III

 1 May 2025

 

 

 The business cycle for traders

The business cycle for investors

TA, Gold, and the Last Man Standing

Technical analysis (TA) cannot predict the future, and doesn’t pretend to understand the economy. All it does is track price action, look for repeating patterns and try to spot momentum. You might say it is as useful as astrology. It correlates with the economy, but investors are always ahead, on a parallel wave.

Worth listeing to Chris Vermeulen of TechnicalTraders, who does a short daily market recap. His style is relaxed tailor’s dummy more than showman. He reads the runes in technical charts. While TA has its limits, what Chris does well is to spot the rotations between asset classes. Money seems to be flowing out of stocks, but where is it flow to? Treasuries? Gold? Defensive safe ETFs like XLP (consumer staples) or XLU (utilities)?

His point right now is that money is quietly flowing out of equities. The pro.s are selling into every rally, the smart money is getting out and rotating onto safer ground.

Why into TLT? That’s where the Dollar Milkshake Theory comes in.

Generally speaking, if you expect interest rates to rise, it is best to avoid long-term bonds like those tracked by the TLT, because if that happens, you're locking in a lower interest rate. If you believe interest rates will fall, it makes sense to invest in a long-term bond fund like TLT. TLT tracks the Barclays U.S. 20+ Year Treasury Bond Index.

Most commentators expect the dollar to weaken under the weight of US debt. There will be less and less demand for the dollar as there is more and more dollar-printing. Makes sense, but Brent Johnson disagrees. His theory is that years of global monetary expansion have created a “milkshake” of liquidity. So first of all. let us examine how all this liquidity is created and where it is held.

The "milkshake" in the Dollar Milkshake Theory refers to the vast pool of global dollar liquidity, the dollars that have flooded the world economy since 2008, although not held exclusively in Europe, this pile of US dollars outside the US is called the Eurodollar market.

 

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How the milkshake forms (monetary expansion):

1. Quantitative Easing (QE):
   The Fed created trillions of dollars to buy US Treasury bonds and mortgage-backed securities — injecting USD into the banking system.

2. Low interest rates:
   Cheap borrowing made USD attractive to global investors, corporations, and governments.

3. Global demand for USD:
   The US dollar is the world’s reserve currency. Most international trade, lending, and commodities (like oil) are priced in USD.

4. Eurodollar system:
   Non-US banks create "dollar credit" outside US regulatory oversight — more dollar-like assets circulate globally than exist inside the US.

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Where the milkshake “sits”:

The dollar liquidity is held across:

• Foreign central banks’ reserves

• Sovereign wealth funds and pension funds

• Global trade finance (e.g., letters of credit in USD)

• Foreign dollar-denominated debt

• Offshore (Eurodollar) banking systems

• Dollar-based assets (e.g., US Treasuries held abroad)

The milkshake is not just inside the US — it’s a vast global ocean of dollar obligations and instruments, mostly outside US borders.

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Flow diagram showing how the Fed creates liquidity
and how it flows offshore to become the “milkshake”

  - . When the Fed tightens, it draws that liquidity back in. Investors crowd into the dollar. That strengthens the dollar, sucks capital into the US, and causes immense pressure on foreign economies with dollar-denominated debt as repayments must be made in the now-more-expensive dollar.

In time, the dollar breaks too. Too much demand becomes unsustainable. The US buckles under its own interest burden, foreign trust in fiat evaporates, and the last man standing is gold.

 

Dollar Milkshake Theory schematic – capital flows

Brent Johnson says gold will rise when everything else fails. That’s the idea. It's not just about price movement. It's about trust. Fiat currency is not a promise in which one can have confidence. Gold is.

Chris Vermeulen thinks we could see a 20–30% drop in markets after the next bounce. He’s watching the rotations. Gold might be going retail now. Maybe even bubble territory. Maybe gold will collapse with the main indices. Or he says wait for a correction, maybe to 3145, and could buy in then.

David Lin, meanwhile, is the brisk counterpart. He interviews big names in economics, sometimes sharply. He and Chris recently sat down for a good discussion: negative growth, volatility, distrust in banks, everyone seeking a hedge.

Gold is the refuge. For now.

Gold price trend vs VIX vs SPY

Eventually, though, even gold may sell off in a global fire sale. But you will have sold and will be in mountains of cash, possibly a new currency. The trick then will be to buy the surviving companies from out of the ashes.

If we live that long.

Interview with Chris Vermeulen and David Lin
Dollar Milkshake Theory primer

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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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THE DOLLAR MILKSHAKE THEORY PART I

16 March 2025

The aim of this article is to explain the dollar milkshake, the theory to those who haven't heard of it before.

https://www.theinvestorspodcast.com/dollar-milkshake-theory/

https://youtu.be/zHzFLoMLfpA?si=fbuHEYWW0JZzZ5D0

In Part I, we will look at when and why America came off the gold standard and the immediate consequences.

1. When did America come off the gold standard?

1. Nixon took the U.S. off the gold standard on August 15, 1971. This event, known as the Nixon Shock, ended the direct convertibility of the U.S. dollar to gold and marked the beginning of the fiat currency system.

2. Saudi Arabia agreed to price all its oil contracts in U.S. dollars in June 1974. This agreement, known as the Petrodollar System, was part of a deal between the U.S. and Saudi Arabia where the U.S. provided military protection and economic aid in exchange for Saudi Arabia selling oil exclusively in dollars. This system was later adopted by other OPEC nations.

2. Why did America come off the gold standard??

Nixon took America off the gold standard on August 15, 1971, because the U.S. could no longer maintain the fixed gold-to-dollar exchange rate set by the Bretton Woods system. The main reasons were:

1. Trade Deficits and U.S. Dollar Overhang

After World War II, the U.S. became the world’s economic leader, and the dollar was the global reserve currency.

The Bretton Woods system (1944) required the U.S. to exchange dollars for gold at a fixed rate of $35 per ounce.

However, U.S. trade deficits increased, flooding the world with more dollars than the U.S. had gold to back.

2. Foreign Nations Redeeming Dollars for Gold

Countries like France (under Charles de Gaulle) and West Germany began exchanging their dollars for gold, depleting U.S. reserves.

Gold outflows accelerated, and the U.S. was at risk of running out of gold.

3. Inflation and U.S. Spending (Vietnam War & Social Programs)

Massive U.S. government spending on the Vietnam War and Great Society programs (social welfare) increased inflation.

More dollars were printed without an increase in gold reserves, making the fixed $35/oz gold peg unsustainable.

4. Speculation and the Run on Gold

By 1971, investors and foreign central banks began dumping dollars for gold, fearing devaluation.

The British requested $3 billion in gold from the U.S. Treasury, worsening the crisis.

5. Nixon’s Solution: The “Nixon Shock”

On August 15, 1971, Nixon suspended gold convertibility, effectively ending the gold standard.

This meant foreign governments could no longer redeem dollars for gold, making the dollar a fiat currency.

He also imposed wage and price controls to curb inflation, but these were temporary measures.

Outcome of the Decision

The U.S. dollar weakened, but Nixon’s move prevented a total depletion of U.S. gold reserves.

This led to the modern floating exchange rate system, where currencies fluctuate based on market forces.

It also led to high inflation in the 1970s (the stagflation era) until the Federal Reserve raised interest rates sharply in the 1980s.

Summary

Nixon ended the gold standard to prevent a total gold reserve collapse, stop a run on U.S. gold, and maintain economic stability amid rising inflation and trade deficits.

3. What happened between these two dates to the dollar?

Between August 15, 1971 (when Nixon took the U.S. off the gold standard) and June 1974 (when Saudi Arabia agreed to price oil in U.S. dollars), the U.S. dollar lost significant value due to inflation and market uncertainty. Here’s what happened:

1. Immediate Impact of Leaving the Gold Standard (1971-1973)

The dollar devalued sharply because it was no longer backed by gold, leading to a loss of confidence.

Inflation surged, as the U.S. printed more money to cover deficits, especially due to the Vietnam War and domestic spending.

The Bretton Woods system collapsed, and the dollar was allowed to float freely against other currencies.

By December 1971, the U.S. devalued the dollar by 8.57%, resetting the exchange rate from $35 per ounce of gold to $38 per ounce.

2. Oil Crisis & Further Dollar Devaluation (1973-1974)

In 1973, the U.S. dollar devalued again, increasing the price of gold to $42.22 per ounce.

The 1973 Oil Crisis erupted after OPEC imposed an oil embargo in response to U.S. support for Israel in the Yom Kippur War.

Oil prices quadrupled, causing major inflation in the U.S. and further weakening the dollar.

3. Why Saudi Arabia's 1974 Petrodollar Deal Stabilized the Dollar

By mid-1974, the dollar was at risk of further collapse due to the oil shock and economic instability.

The petrodollar agreement required Saudi Arabia to sell oil only in dollars, creating artificial demand for the U.S. dollar.

This stabilized the dollar’s decline and strengthened its global reserve currency status.

Overall Change in Value

Between 1971 and 1974, the U.S. dollar lost purchasing power due to inflation and devaluation.

However, the petrodollar system in 1974 helped stop the freefall and ensured continued demand for dollars in global trade.

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