Global Shockwaves: Is the Dollar Milkshake Theory Predicting the Next Financial Crisis?

Brent Johnson's Dollar Milkshake Theory explains how a strengthening dollar creates a global liquidity crisis, forcing the world into a sovereign debt crisis that only benefits the United States.

Key Takeaways

• The Dollar Milkshake Theory posits that despite global central bank stimulus, the US dollar acts as a "straw" that sucks up all global liquidity due to structural advantages
• The massive eurodollar market outside US regulatory oversight creates uncontrolled demand for dollars that dwarfs the domestic US dollar system
• Triffin's Dilemma explains why US domestic policy needs (tight money) conflict with global needs (loose money), creating impossible tensions in the current system
• Fed rate hikes function as global monetary tightening because the world trades and borrows in dollars, making US policy decisions affect everyone
• The debt-based monetary system requires constant growth—when circulation stops, only the Federal Reserve can create new dollar collateral to prevent collapse
• Dollar weaponization through selective access to swap lines allows the US to extract geopolitical leverage by controlling dollar liquidity during crises
• Current market sell-offs may not trigger immediate Fed intervention because political pressure to fight inflation outweighs concerns about asset price deflation
• The sovereign debt crisis represents an existential moment where countries must choose sides between US-led and China-Russia blocs for access to dollar funding
• Johnson maintains high conviction that his framework is correct despite getting timing wrong on previous predictions about the crisis timeline

Timeline Overview

• 00:00–12:45 — Introduction and Dollar Milkshake Theory Basics: Brent Johnson explains his background in wealth management and introduces the core concept that while the world creates liquidity, the US has the "straw" to suck it all up, referencing the "There Will Be Blood" oil drilling analogy
• 12:45–25:30 — Theory Development and Timing: How Johnson developed the theory starting in 2016-2017, initially predicting crisis in 2019-2020, acknowledging timing mistakes but maintaining framework conviction as COVID delayed the inevitable through coordinated global response
• 25:30–38:15 — Why Today is Different from 2020: The shift from coordinated unipolar response to fractured bipolar world with Russia-China vs West tensions, plus high inflation preventing easy money policies that worked during COVID crisis
• 38:15–50:48 — Global Reserve Currency Dynamics: How US rate hikes affect the entire world due to dollar's reserve status, forcing global monetary tightening even when individual countries need easier policy for domestic reasons
• 50:48–63:21 — The Eurodollar System Explained: The massive unregulated dollar market outside US borders that dwarfs domestic dollar markets, creating opaque web of dollar-denominated debt with no regulatory oversight or measurement
• 63:21–76:06 — Debt-Based Monetary System Mechanics: How money is loaned into existence with accompanying interest, requiring constant growth to prevent deflationary collapse, with only the Federal Reserve able to create new base dollar collateral
• 76:06–88:39 — Triffin's Dilemma in Action: Current conflict between US domestic needs (tight money to fight inflation) versus global needs (loose money and dollar funding), creating impossible policy tensions
• 88:39–101:24 — Fed Independence Myth and Political Calculations: Why the Fed isn't truly independent from Congress, and how political pressure to fight inflation may allow asset price deflation while maintaining hawkish policy
• 101:24–114:09 — Dollar Weaponization Strategy: How rate hikes serve geopolitical purposes by pressuring other countries during great power competition, using dollar liquidity as leverage to force alliance choices
• 114:09–126:36 — Financial Repression vs Political Reality: The theoretical appeal of inflating away debt through negative real rates versus political impossibility of tolerating high inflation without losing elections

The Dollar Milkshake Theory: America's Global Financial Straw

Brent Johnson's Dollar Milkshake Theory provides a framework for understanding why the US dollar continues strengthening despite massive global monetary stimulus and predictions of its demise. The theory centers on the idea that while central banks worldwide create liquidity, structural advantages allow the United States to capture that liquidity regardless of its origin.

• The theory draws its name from the "There Will Be Blood" scene where an oil baron explains that he can "drink your milkshake" by drilling a straw deep enough to reach oil on his competitor's property
• Global central banks including the ECB, Bank of Japan, and others have provided massive stimulus since 2008, but the US dollar sits at 22-year highs despite the Fed's own aggressive easing policies
• Johnson first developed this framework in 2016-2017, initially predicting a sovereign debt crisis in 2019-2020, acknowledging timing errors while maintaining conviction in the underlying structural analysis
• COVID-19 delayed the crisis by forcing coordinated global response, but the current shift from cooperation to great power competition creates conditions for the theory to play out
• The fundamental insight is that in global finance, "it doesn't really matter who provides the liquidity, what matters is who captures the liquidity" through structural advantages
• Despite decades of predictions about dollar decline, the currency's unique position in global trade and finance means that crises actually strengthen rather than weaken dollar demand

The Hidden Eurodollar System: An Unregulated Financial Web

The eurodollar market—dollars circulating outside the United States—represents a massive, largely unregulated financial system that creates structural dollar demand while remaining invisible to most policymakers and investors.

• The eurodollar market "dwarfs the US domestic dollar market" but operates without any US regulatory oversight, creating an opaque web of dollar-denominated credit relationships
• These are not euros but rather any US dollars held by banks, shadow banks, or corporations outside the United States, used for trade finance and operational purposes
• No US regulator has jurisdiction over this market, meaning "there's also been no measurement" of its true size despite decades of uninhibited growth
• The system creates a "spiderweb of dollar-based credit that's been extended from one entity to another to another" without regulatory limits or oversight
• This unregulated growth has created "an incredible amount of demand for US dollars" because the entire system depends on dollar liquidity that only the Federal Reserve can ultimately provide
• When dollar circulation stops or credit contracts in this system, "there is no entity out there that can go in and create new collateral" except the Federal Reserve
• The eurodollar system's opacity means that even financial professionals with decades of Wall Street experience often don't understand its existence or implications

Triffin's Dilemma: The Impossible Policy Choice

The current global monetary policy divergence illustrates Triffin's Dilemma in real time, creating unsustainable tensions between US domestic needs and global dollar requirements that Johnson believes cannot be resolved without significant pain.

• Triffin's Dilemma states that when a country's currency serves as the global reserve currency, "the needs of the global economy will come into conflict with the needs of the domestic economy"
• The US domestic economy currently needs "tight money and higher interest rates" to combat inflation, while the rest of the world needs "dollar funding and a weaker dollar"
• This creates monetary policy divergence where other central banks like the ECB and Bank of Japan maintain extremely easy policy while the US tightens aggressively
• When "the US raises rates, they raise rates on the whole world" because global trade and borrowing occurs in dollars, making US policy decisions affect everyone
• Countries needing easy monetary policy for domestic reasons find themselves facing tighter conditions because dollar appreciation makes their dollar-denominated debts more expensive
• Johnson believes this dilemma "doesn't get resolved without pain" and that any efforts to solve the problem "really only make the problem bigger"
• The only ways out involve either redesigning the entire global monetary system or allowing everything to collapse and restart—neither politically acceptable to current leadership

The Debt-Based System's Requirement for Endless Growth

Understanding how money is created and destroyed is crucial for grasping why the dollar system faces structural instability that ultimately benefits the United States as the only entity capable of creating new dollar collateral.

• Money is "loaned into existence" with accompanying interest requirements, creating a system that "has to grow" constantly because debt service requires more money than was originally created
• The monetary system works "as long as money is circulating or as long as new credit is being extended," but faces crisis when circulation stops or debt starts collapsing
• Only the Federal Reserve and US Treasury can create "base money" or "base collateral"—the foundation upon which all other dollar-denominated credit is built
• When debt gets large enough, "it will eventually start to reverse and it will start to collapse on itself" like "trees grow to the sky until they collapse"
• During collapse, "the only way to keep the system from collapsing is either to get the circulation going again or to put new collateral into the system"
• This creates structural dependency on the Federal Reserve as the only entity that can "re-collateralize the system" by putting new reserves or liquidity into global markets
• The debt-based nature of the system means that any pause in growth creates deflationary pressures that cascade through the entire global financial system

Federal Reserve Independence: A Convenient Fiction

Johnson challenges the notion of Federal Reserve independence, arguing that the central bank operates as a political entity focused on supporting the current administration's electoral prospects while serving broader US geopolitical interests.

• The theory that "the Fed is an independent agency of the US government" should be abandoned because "the Fed is overseen by the US Congress" and operates at their pleasure
• Congress remains "happy to let the Fed believe that they're independent" as long as the Fed "is playing ball," but can "rewrite that law very quickly" if needed
• The Fed's current priority is "to get Biden re-elected and to keep Trump out of office" by addressing inflation, which represents "the biggest current knock against Biden"
• Political pressure explains why the Fed is "willing to accept asset price deflation in their attempt to get consumer price inflation under control"
• The theoretical solution of financial repression—inflating away debt through negative real rates—becomes politically impossible because "people don't like it when their cost of living goes up"
• Historical precedent shows that "very rarely has there been a revolution anywhere in the world where inflation wasn't a part of the reason for the revolting"
• Fed officials understand that politicians are "nothing if not political animals" who "more than anything in the world want to get reelected," making inflation control essential regardless of market consequences

Dollar Weaponization: Financial Warfare Through Liquidity Control

The current rate hiking cycle serves dual purposes of domestic inflation control and geopolitical leverage, with the US using dollar liquidity as a weapon to extract concessions from other countries during the shift from unipolar to bipolar world order.

• The dollar represents "probably other than the nuclear weapons that we have, it may be the most powerful weapon that the United States has" through its control over global liquidity
• Rate hikes are "putting incredible pressure on the rest of the world" and Johnson believes this is "being done on purpose to a certain extent" for geopolitical reasons
• By creating dollar scarcity, the US puts countries "in a position where they need your help or they need your assistance" just as "battle lines are being drawn"
• Swap lines become political tools where the US can say "we will help you out, we'll give you a swap line, we'll help you get access to dollar funding" in exchange for geopolitical support
• Countries like China and Russia "are not going to get a swap line," while allies receive preferential access to dollar liquidity during crises
• This creates "the haves and the have-nots" where the US "is going to drive a very hard bargain" to "re-exert their dominance as the global hegemon"
• Johnson sees this as the US acting like a lion that "just gets up and beats the crap out of all of them" after tolerating challenges for too long

The Coming Sovereign Debt Crisis: Endgame Dynamics

Johnson maintains high conviction that current conditions are building toward a sovereign debt crisis that will force countries to choose sides in great power competition while strengthening rather than weakening the dollar's global dominance.

• The crisis represents "the end game phase of what has been a 40-year paradigm of falling interest rates, rising debt levels, low inflation, growing inequality and peak globalization"
• Current market conditions differ from 2020 because the world has moved "from this unipolar world of great coordination to a bipolar world of great confrontation"
• The eurodollar system's unregulated growth combined with Triffin's Dilemma creates conditions where "when pain happens, I think the dollar goes higher"
• Countries will be forced to choose between US-led and China-Russia blocs, with access to dollar funding serving as the primary leverage mechanism
• Johnson acknowledges getting timing wrong previously but maintains that "if I'm even a little bit right on this, the implications are enormous for portfolios and for governments and for society as a whole"
• The wealth management professional emphasizes that "based on the job that I have, I don't have the luxury of ignoring this problem" even if conviction levels were lower
• Market sell-offs may not trigger immediate Fed intervention because "they do want to get these inflationary pressures under control" even at the cost of asset price deflation

The Dollar Milkshake Theory provides a framework for understanding how structural features of the global monetary system create conditions that benefit the United States during periods of stress, regardless of apparent weaknesses in American fiscal or monetary policy. Johnson's analysis suggests that efforts to escape dollar dependence face insurmountable structural obstacles, making crisis episodes strengthen rather than weaken American financial dominance.

Practical Questions and Answers

Q: How does the Dollar Milkshake Theory explain why the dollar keeps strengthening despite massive US money printing? A: While all central banks provide liquidity globally, the US has structural advantages that act like a "straw" to capture that liquidity. The dollar's role as the global reserve currency, the massive unregulated eurodollar system, and the fact that only the Fed can create new dollar collateral mean that crisis periods increase dollar demand regardless of US monetary policy.

Q: What is the eurodollar system and why does it matter for global finance? A: The eurodollar system consists of US dollars held outside the United States in banks, shadow banks, and corporations worldwide. This market dwarfs the domestic US dollar market but has no regulatory oversight, creating an opaque web of dollar-denominated credit that generates structural demand for dollars that only the Federal Reserve can ultimately satisfy.

Q: Why can't other countries just stop using dollars to escape this system? A: Escaping requires a political solution rather than market-driven change. The debt-based monetary system and decades of dollar-denominated obligations create a "spiderweb" effect where trying to leave only tightens the constraints. Only coordinated political action could change the system, not individual country decisions.

Q: How does Triffin's Dilemma explain current global monetary policy conflicts? A: Triffin's Dilemma describes how the needs of the US domestic economy (tight money to fight inflation) conflict with global needs (loose money and dollar funding). When the US raises rates, it effectively tightens monetary policy worldwide because global trade and borrowing occur in dollars, creating impossible policy tensions.

Q: Why doesn't the Fed immediately reverse course when markets crash like they did in 2020? A: Political pressure to fight inflation may override market concerns, especially since politicians need to address cost-of-living increases to get reelected. The Fed may accept asset price deflation as necessary to control consumer price inflation, unlike 2020 when inflation wasn't a political issue.

Q: How does dollar weaponization work in practice during geopolitical tensions? A: The US can use dollar liquidity as leverage by providing or withholding access to swap lines and dollar funding. Countries needing dollar access during crises must align with US geopolitical objectives, creating a "haves and have-nots" dynamic that reinforces American global dominance.

Q: What would it take for Johnson to change his view on the Dollar Milkshake Theory? A: Johnson acknowledges he could be wrong but emphasizes that "even if I didn't have the conviction level that I have, based on the job that I have I don't have the luxury of ignoring this problem." The structural nature of the analysis makes it difficult to disprove until the actual crisis plays out or the entire system gets redesigned.

Conclusion

The Dollar Milkshake Theory suggests that current global financial instability represents not random market volatility but the logical outcome of structural features built into the international monetary system. Understanding these dynamics becomes crucial for navigating what Johnson sees as an inevitable sovereign debt crisis that will reshape global power relationships.