This is an opinion editorial by Luke Mikic, writer, podcast host and macro analyst.
This is the first part in a two-part series about the Dollar Milkshake Theory and how this is the natural progression to the “Bitcoin Milkshake.”
Introduction
How many times have you heard claims like this from macroeconomics and sound money advocates lately? These types of opinions have become so common, that it is now mainstream opinion to declare that we are about to die the US dollar and the subsequent collapse of the US empire. On the same subject : 2022 Global Health Security Conference – United States Department of State. Is modern America about to suffer the same fate as Rome, or is there an economic wild card still hiding in the country?
Similarly dire predictions were made about the US dollar in the 1970s during the “Great Inflation,” following the abandonment of the gold standard in 1971. It took the dynamic duo of Richard Nixon and Henry Kissinger to pull a rabbit out of the hat to save it. the US dollar. They effectively backed the USD with oil in 1973, giving birth to the petrodollar experiment.
It was an ingenious move that ended the life of the dollar and the hegemonic reign of the US as the world’s dominant superpower. The lesson we should take from this example in the 1970s is not to underestimate a great empire. They are an empire for a reason. Could the United States be forced to play another monetary wild card today to maintain its power as a global hegemon in the face of de-dollarization?
History is not changed, but it often runs.
Another parallel to the 1970s is unfolding today as Federal Reserve Chairman Jerome Powell aggressively raises interest rates in an attempt to combat the biggest inflation we’ve seen since then. Is Powell fighting inflation or trying to save the credibility of the US dollar in the midst of a 21st century currency war?
I believe we are missing out on a globally interconnected, fiat-based financial system. There are currently over 180 different currencies in the world, and in these two articles I will outline how we will end the decade with two currencies left standing. another dynamic duo, if you will.
Most people assume that these two currencies will remain in violent opposition to each other, but I’m not so sure. I believe they will form a symbiotic relationship when they complement each other, the same way a plump cherry complements milkshake on a warm sunny day.
But how do we get there, and why do I believe the US dollar will be one of the last dominoes to fall? Simple gravity! Yes, the US has record fiscal deficits. Yes, the US has $170 trillion in unfunded liabilities. But gravity is gravity, and there is an estimated $300 trillion of economic gravity worldwide making the US dollar likely to be the last fiat currency to hyperinflate. This is the biggest mistake people make when they analyze the dollar. We often look only at the dollar supply and an exponentially growing Fed balance sheet.
However, everyone is forgetting the first lesson of Economics 101: supply and demand. Dollars are in huge demand around the world.
This is a Bitcoin publication, so I will also be discussing bitcoin’s potential role in the cascading fiat currency collapse that I expect in the coming months and years.
If you accept the hypothetical assumption that one day the world will operate on a bitcoin standard, most people will assume that this is bad for the United States, as it is the current holder of global reserve status. However, bitcoin monetization benefits one country disproportionately more than any other: the United States.
This dynamic feedback loop will eventually become an all-consuming black hole in fiat currency.
Welcome to the “Bitcoin Milkshake Thesis,” the delicious macroeconomic dessert you haven’t heard of.
Let me explain many of these complex macroeconomic theories that prevail today: petrodollar, eurodollar, dollar shake, bitcoin shake, Ray Dalio’s “Changing World Order”.
Most importantly, I’ll explain how they all relate to the most delicious dynamic duo in the macroeconomic dessert place: the Dollar Milkshake meets the Bitcoin Milkshake.
The Dollar Milkshake Theory
By now, you’ve probably seen the effects of the “Dollar Milkshake Theory” on financial markets. The Dollar Milkshake Theory, created and proposed by Brent Johnson in 2018, helps explain why every asset class in the world is shrinking. This may interest you : How the United States Exports Inflation to Other Countries. From global equities, blue chip tech stocks, real estate and bonds, money is flowing out of the assets and currencies of sovereign nations and into the global safe haven: the US dollar.
If there is one chart that explains the Dollar Milkshake, this is it.
Distilled into its simplest format, the Dollar Milkshake Theory explains how the macroeconomic endgame will unfold for our debt super-circle. It details the order in which Johnson believes the dominoes will fall as we transition to a new monetary system.
The “milkshake” portion of this delicious dessert consists of the trillions of dollars in liquidity printed by global central banks over the past decade. Johnson points out that the USD is the straw that will overcome all that liquidity when capital seeks safety in times of financial risk. Capital flows to where it is best spent. Johnson suggests that the US dollar is the ultimate fiat currency, as sovereign nations are forced to devalue and hyperinflate their own national currencies to get the US dollars they need during a global sovereign debt crisis.
Simply put, the Dollar Milkshake Theory is an expression of the structural imbalances in our monetary system. These imbalances were anticipated and even predicted by John Maynard Keynes at the Bretton Woods conference in 1944 and criticized by Robert Triffin in the 1950s and 1960s. The consequences of abandoning the gold standard without using a neutral reserve asset were eventually coming back to haunt the world economy.
With the dollar wrecking ball currently wreaking havoc on our financial system and bankrupting governments around the world, I thought it would be timely to revisit what I said over a year ago:
That quote came from an article I published in a series called “Bitcoin The Big Bang To End All Cycles.” In the piece, I analyzed the history of long-term 80-year debt cycles and the history of hyperinflation to conclude that the inflation that had just reared its head in 2021 was not going to be temporary, and instead would be It is an accelerating catalyst. which would encourage us towards a new monetary system by the end of the decade. Despite expecting an acceleration, I was still surprised by the acceleration we’ve seen since mid-2021.
Here, I’ll take a more granular look at the intermediary stages of this global sovereign debt crisis, exploring the role bitcoin will play as this unfolds. That will give us a clue as to who will most likely be the next global reserve currency after this massive debt cycle ends.
Many people are saddened by the US dollar destroying every other fiat currency in the world. How is this possible? There are two major systems that have led to the structural imbalances in our world economy: the eurodollar market and the petrodollar system.
Much of the dollar-denominated debt mentioned above was created by banks outside the United States. This is where the term “eurodollars” comes from. I am not going to explain to you the eurodollar market, rather give you the basics of this thesis. The main takeaway we need to understand is that the eurodollar market is rumored to be in the tens and even hundreds of trillions of dollars!
This means that there is actually more debt outside the US than inside the country. Many countries chose, or were forced, to take on debt denominated in US dollars. To repay that debt, they need access to dollars. In times of economic slowdown, a global shutdown or when exports are low, those other countries sometimes have to resort to printing their own currencies to gain access to US dollars in the foreign exchange markets to pay off their dollar-denominated debts. designated to pay.
When the dollar index rises – indicating that the US dollar is getting stronger against other currencies – this puts even more pressure on these countries with large dollar debts. This is exactly what we are seeing today as the dollar index (DXY) hit 20 year highs.
The monthly chart for the dollar index (DXY) dating back to 1981 shows 20-year highs.
For a more detailed breakdown of the Dollar Milkshake Theory and its devastating effects on markets today, I have dedicated a blog to explain the thesis.
This shake-up dynamic creates a huge demand for US dollars outside the country, which enables and requires the Fed to create massive amounts of liquidity to provide the world with the dollars it needs to pay its debts. to service. If the Fed wants the world economy to function efficiently, it just needs to supply the world with dollars. This is a key point. In a world that is globally interconnected during peacetime, it makes sense that the Fed would provide the world with the necessary dollars.
Since we have been on the petrodollar system for the past 50 years, we have received many calls for the death of the dollar. However, the most threatening times facing our financial system came when the US dollar was in short supply, and the DXY has strengthened against other currencies.
The Deadly Dollar Bull Runs
The dominant story in the macroeconomic environment over the past decade has been surrounded by the Fed and central banks with an unprecedentedly loose monetary policy. See the article : Netflix is bringing back its Tudum event in September. However, this appears to be changing in 2022.
As we watch the Fed and central banks around the world raise interest rates in an attempt to control inflation, many are surprised and confused as to what this new paradigm of policy tightening will entail. monetary to our deglobalized global economy. It is crucial to remember: All fiat currencies are losing purchasing power against goods and services.
All currencies are rapidly devaluing and will eventually return to their intrinsic value of 0. Of the hundreds of currencies that have existed since 1850, most have gone to 0. Right now, we’re in the process of seeing the last trend of 150 or so. to 0 in global competitive minimization to the bottom.
One of the big gauges that everyone uses to measure this relative strength is the dollar index. It is measured against six major currencies: the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc.
Since 1971, the DXY has had three major bull streaks that have threatened the stability of the global financial system. Every time the US dollar rallied, it destroyed the balance sheets of emerging market countries that took on too much US debt with too few reserves.
In this dollar bull cycle, it’s not just peripheral emerging markets that are suffering from the growing US dollar. Every single currency is being pushed out against the mighty renaissance. The Japanese yen has long been viewed as a safe haven alongside the US dollar and has for many years been held up as the poster currency by Keynesian economists. They were more than happy to point to Japan’s massive debt-to-GDP ratio of 266%, along with the Bank of Japan’s massive 1,280-trillion-yen balance sheet with years of low inflation.
Japan held $1.3 trillion of US Treasurys as of January 2022, overtaking China as the largest foreign holder of US debt.
The Japanese and Chinese have recently resorted to selling their US Treasury holdings as they suffer from a global dollar shortage.
A weak Japanese yen is usually bad for China because Japanese exports become more attractive the weaker the yen gets. That is why every time the yen has weakened significantly, the yuan has usually followed. It seems that there is no exception to this rule in 2022, and close attention should be paid to the other Asian currencies that are exporting, such as the South Korean won and the Hong Kong dollar.
Then we have the Hong Kong dollar peg, which is also on the verge of a major breakout, still tapping the 7.85 peg.
This peg has been running for over 30 years.
This peg has been running for over 30 years.
Shifting our attention to another energy-poor area, we can see that the USD has tremendous strength against the euro, which is the world’s second largest currency. The EUR/USD has broken a 20-year support line and recently traded below parity with the dollar for the first time in 20 years. The eurozone is suffering greatly from a fragile banking system and energy crisis with its currency losing 20% of its value against the dollar in the last 18 months alone.
The euro lost 20% of its value against the dollar in just 18 months.
The European Central Bank looks to be in crisis mode as they have barely gotten interest rates into positive territory, and the Fed has moved its federal funds rate to nearly 4%.
The Fed moved its federal funds rate to nearly 4%.
This has resulted in significant capital flight from Europe, and due to the recent volatility of its bond market, ECB President Christine Lagarde has had to announce a new form of quantitative easing (QE). This “anti-fragmentation” tool is a new form of QE where the ECB sells German bonds to buy Italian bonds in an attempt to hold the fractured eurozone together.
This dollar bull run is wreaking havoc on the world’s largest and safest currencies. The three biggest alternatives to the US dollar are the yen, the euro and the yuan and are all contenders should the US lose its reserve currency status. But emerging market currencies are where the real pain is felt the most. Countries like Turkey, Argentina and Sri Lanka are experiencing 80% over inflation and are great examples of how the dollar wrecking ball hurts smaller countries the most.
What Comes Next?
The DXY has had a hell of a run over the past 12 months, so a pullback wouldn’t surprise me. The DXY and the more co-weighted broad dollar index have both extended significantly after parabolic highs in 2022 and are now breaking down from their parabolas.
A one-day chart of the DXY showing a parabolic rise
A one-day chart of the trade-weighted broad dollar index, also showing a parabolic rise
Could we see the Fed’s balance sheet to $50 trillion and at the same time see hyperdollarization as the eurodollar market is absorbed?
Yes, but I think the Fed is racing the clock. The petrodollar system is rapidly breaking down as the BRICS nations race to establish their new reserve currency.
It is important to note that this milking situation was always coming. The structural imbalances in our financial system would always be reflected in this domino effect of currency collapse that Brent Johnson pointed out.
Interestingly, I believe some recent events have accelerated this process. Yes, I see all the signs the dollar fans are saying; the dollar will die eventually, but not yet. However, let’s entertain the idea that the dollar is really dying, and the USD will lose its reserve currency status.
Who would take over the world’s global reserve currency?
For the economic reasons I mentioned above, I do not believe that the euro, the yen or even the Chinese yuan are viable substitutes for the US dollar. In a recent article titled, “The Global Currency Wars of the 2020s,” I explored the thesis of Ray Dalio and Zoltan Pozsar and explained why I believed both were ignoring the geopolitical, demographic, and energy that was ahead of all the competitors in the US.
I believe that commodities are undervalued and that we will see a “commodity supercycle” for the 2020s due to years of underinvestment in the industry. I also believe that securing commodities and energy will play a central role in the nation’s security, as the world continues to de-globalize. However – not disagreeing with Pozsar here – monetary backing with commodities is not the solution to the problem facing the world.
I believe the US dollar will be the last fiat currency to hyperinflate, and in fact I expect it to retain reserve currency status until this long-term debt cycle comes to an end. To go one step further, I actually think there is a strong possibility that the United States will ever be the last country to hold the title of “world reserve currency issuer” if they play their cards right.
We will explore the Bitcoin Milkshake Theory in part two.
This is a guest post by Luke Mikic. The views expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
