Dollar Milkshake Theory (And Why It's Wrong)

In this video, I discuss Brent Johnson's "Dollar Milkshake Theory" and why I think it is wrong. I contrast it with my own theory ("Dollar Bloody Mary Theory"), which I believe is a better hypothesis of how Federal Reserve monetary policy actually works, especially in 2020 and going forward.

In contrast to the dollar milkshake theory, I believe that whenever there is a sharp spike in the US dollar, the Federal Reserve will simply print more money, buy more US Treasuries, and extend more currency swap lines with other central banks. A very strong US dollar is like a wrecking ball for the global financial system: it leads to both lower stock and commodity prices, as well as to international investors dumping US Treasuries and other US assets to raise USD.

Due to the US's large negative net international investment position, the Fed can never again let the USD rise a lot, since it will lead to international investors dumping US Treasuries and other US assets. The US economy is now so hyper-financialized that it cannot withstand the higher interest rates that would come with investors dumping Treasuries.

If necessary, the Fed can bring the entire Eurodollar system onto its own balance sheet by just printing a lot of money and propping up asset prices. This is extremely bullish for both gold and Bitcoin over the coming years.

The dollar milkshake is over. All that's left is the dollar bloody mary, where we are forced to pile on more debt and print more money ("hair of the dog that bit us") in order to treat our financial hangover.

Not investment advice! Consult a financial adviser.

Santiago Capital and Brent Johnson:

Effective Fed Funds Rate:

Fed balance sheet:

TED Spread chart:

M2 Money Supply:

The Fed has monetized all Treasury issuance in 2020:

Eurodollar system explained:

Fed begins currency swaps:

Matthew Kratter is the author of the Amazon best-seller "A Beginner's Guide to the Stock Market":

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[galicians]

2 years later: the dollar milkshake theory is more valid than ever.

[mar]

Brent Johnson is very open to talk to youtubers about his theory, you have a decent channel why don't you interview him and debate his theory

[ivancho]

A follow up to this video is probably warranted now. Thanks.

[TonyFontaine]

Looks like he was right on the dollar milkshake theory

[nastasiaj]

So basically your premise is that the fed will print whatever it needs to in order to avoid the straw. But that assumes inflation can be ignored. It cannot. That's the supply side.

On the demand side, the demand for U.S. dollars will always be higher than other currencies as long as it retains it's reserve status.

These two factors will always conspire to push the dollar higher relative to other currencies in the long run.

[mankev]

I think this counter theory only holds true if the Fed has the ability to buy bonds and increase liquidity (froth). In our current inflationary environment this no longer holds true and as I write the Japanes Yen, the Chinese Yuan and other global currencies are falling and the dollar is rising. So it appears that the Milkshake theory may hold true in an inflationary environment.

[Economivision]

So far, he’s actually right: and he’s the one guy I was so sure was absolutely wrong.

[ramjamflimflam]

I have the USD; The Toilet Paper Theory.

[Holy_hand-grenade]

I’m just gonna blow up your counter-arguments super quick here...

1.) You’re stating the milkshake is only when the fed takes liquidity out by shrinking its balance sheet. Aside from the fact you’re missing the heart and soul of his theory, then why did the USD index rise from 72 to 102 from 2009 - 2016 when most equity markets were slowly recovering from 2008/2009?

2.) why couldn’t the fed hit its 2% inflation target in most periods after QE started, following the stimulus packages and asset purchase of 2009?

3.). Why is the yen so persistently strong despite 30 years of QE, negative rates and asset purchases?


The dollar and the yen are basically like Bitcoin and Ethereum and nobody wants to sell their DogeCoin for Stellar Lumens. The GBP and EUR are garbage, CAD and AUS are too leveraged to raw materials, nobody trusts anything related to finance with Renminbi etc. etc. so you print $4T more USD into existence, but you also just printed at least as much of foreign fiats... where does all of that liquidity gravitate? Why buy a German Bund with negative yield when I can buy US treasuries and get yield plus get my principal back in USD at maturity? That’s part of the dollar bid he’s talking about, aside from USD’s value as financial lubricant. it doesn’t require balance sheet shrinkage to play out IMO.

[FinancialMaintenance]

Who is watching this 2 years later as the Fed is forced to choose between the dollar and the economy and has to keep raising rates because of inflation.

[MichaelRosmer]

Interesting to watch this video two years later as the DXY has spiked way above the levels in 2020

[giovannipicciuti]

I believe that the theory compares the usd against other fiat currencies, let`s not forget that others central banks also are devaluating their currencies (ECB just announced 750 billion in QE), the Chinese they have to devalue their currencies to facilitate the exports, look what is happening in Argentina, Lebanon and Turkey with their fiat currencies, would it be safer to keep fiat in euro or in the Argentinian pesos? As all money is created as debt what if there will be a series of worldwide defaults and there will be more need of usd as 70% of the world debt is denominated in usd? I believe that the usd will be the last fiat to die as we are in a dollar-denominated fiat system and that the fed intervention due to the dollar`s shortage could lead to strong inflation or hyperinflation, I don`t see any other fiat currencies that can compete with the usd, as you said just buy BTC and gold!

[mickygarcia]

Brent's theory sounds reasonable, simple, and correct; however, I've listened to enough of Steve Keen to think that it's reasonable, simple, and wrong. Thank you for including the Federal Reserve Data. I've listened to a lot of Brent's talks about it, but never have I seen a lick of his data to test it vs. observations.

[allthingsnew]

Glad I’m not the only one who consistently has 59 browser tabs open At once.

[cokechang]

One thing that continued to be ignored by the critics of dollar milkshake theory is Brent Johnson believes that the US dollar will ultimately crash as well, just that it will be the last fiat currency to fail since all other countries will try to keep it afloat until they can’t.

[catcutable]

Misrepresentation of milkshake theory. Author ignores the most important part of milkshake theory that swaps, etc, other countries are printing as well and dollar is more desirable and stronger RELATIVE to other fiats.

[mahernajjar]

This is really eye opening stuff! One question tho, would you suggest buying gold at this time or should a newbie like myself wait until it drops again (perhaps another liquidity crisis/2nd wave of covid) ?

[mdnawsherulalam]

Hello Sir Which companies will benefited most by the FED recent announcement???

[konradzawadzki]

17:43 I think Brent Johnson replied to the the swap lines argument by saying that swap lines are not a gift. They are essentially loans. And also the other party has to print their currency to have something to exchange for those dollars provided through swap lines. So the relative exchange rate remains the same or even rises through time. And also not all players will get their swap lines because of US foreign policy that becomes more "assertive" with each year, not only against China. The argument about FED buying bonds is valid though. I am currious how Brent would reply to it. I guess he would say that it doesnt solve the dollar shortage problem OUTSIDE the US market. I doubt foreign treasury holders will take those dollars and exchange them back to their currencies, where their central banks are playing the exact same curve control game . All the more with Trumps trade policies.

[Wyatt]

I did find myself wishing for a 3x speed button on this, as the 2x speed button still seemed slow. Great to see a counter to Brent’s widely adopted theory. I’ll have to finish it when I’m free of any caffeine or after a deep meditation.