Important points
- The desire for de-dollarization exists, but achieving it is complex.
- The dollar milkshake theory outlines how a sovereign debt crisis affects markets.
- US assets are expected to outperform due to superior market structure.
- Central banks have so far succeeded in preventing a sovereign debt crisis.
- Currency crises are inevitable due to the design of the monetary system.
- The central bank’s main role is to perpetuate the nation by acting as the lender of last resort.
- Gradual mitigation is unlikely because the design of the system requires growth.
- A crisis is inevitable, but its timing is uncertain because of the potential growth from technology.
- Betting on central banks’ ability to manage issues is risky.
- The dollar has had a significant impact on other key currencies since 2021.
- Today, the world is more dependent on the US dollar than ever before.
- The Eurodollar network is the largest in dollar-based transactions outside the United States.
- De-dollarization narratives often misunderstand the complexity of the issue.
- The dollar’s status as the world reserve currency is due to private market preferences.
- The US dollar is expected to appreciate against other fiat currencies over the long term.
Guest introduction
Brent Johnson is the CEO of Santiago Capital, an investment firm focused on macro strategy and capital allocation. He developed the “dollar milkshake theory” in 2018 to explain how the U.S. dollar absorbs global liquidity during a debt crisis. This theory has guided his analysis of currency markets and capital flows over the past several years. Johnson has become a prominent voice on the structural dynamics of the dollar-based financial system, including the role of the Eurodollar market and how emerging technologies such as stablecoins are reshaping the dollar’s hegemony.
Complexities of de-dollarization
There is no question that the desire for de-dollarization exists…but whether it can actually be done is dramatically different from the desire to make it happen.
— Brent Johnson
- The geopolitical influence of the US dollar as the world’s reserve currency poses challenges to de-dollarization.
- The dollar milkshake theory provides a framework for understanding how debt crises affect markets.
The dollar milkshake theory was the framework in which I thought the sovereign debt crisis would impact markets and asset classes.
— Brent Johnson
- U.S. assets are expected to outperform due to their market structure.
I thought the US dollar was going to go up…basically it did from a directional standpoint, but the crisis didn’t come.
— Brent Johnson
- Governments and central banks have so far succeeded in preventing a sovereign debt crisis.
They could keep spinning the plates, kicking cans down the street, and here we are.
— Brent Johnson
The inevitability of a currency crisis
- Currency crises are inevitable due to the design of the monetary system.
The design of our financial system makes it mathematically certain that we will be in crisis.
— Brent Johnson
- The financial system requires constant growth for interest on loans.
The system that lends money to survive needs to grow… there will never be enough money to repay all the loans and interest.
— Brent Johnson
- The central bank’s main role is to perpetuate the nation by acting as the lender of last resort.
Their job is to intervene and solve problems.
— Brent Johnson
- It is unlikely that the system will be gradually relaxed over a long period of time.
Growth is essential in system design.
— Brent Johnson
The role of central banks in economic stability
- Central banks must prevent economic contraction and stimulate growth.
They have to do it in a way that doesn’t cause it to contract and not only stops it from contracting but also starts expanding again.
— Brent Johnson
- A crisis is inevitable, but its timing is uncertain because of the potential growth from technology.
If we have some kind of productivity boom…maybe they can keep this going for another five, 10, 15, 20 years.
— Brent Johnson
- Betting on central banks’ ability to manage issues is risky.
Those who continue to bet on whether central banks can overcome future challenges are doing themselves a disservice.
— Brent Johnson
Impact of the dollar on world currencies
- The dollar has had a significant impact on other key currencies since 2021.
The dollar was like a wrecking ball… Since 2021, the dollar has been drinking the milkshake of the world’s other reserve currencies.
— Brent Johnson
- Desire for de-dollarization is increasing worldwide.
There is no doubt that there are calls for de-dollarization.
— Brent Johnson
- Today, the world is more dependent on the US dollar than ever before.
Today, the world is more dependent on the dollar than ever before.
— Brent Johnson
- The Eurodollar network is the largest in dollar-based transactions outside the United States.
The Eurodollar Network is…the largest network in history.
— Brent Johnson
Misconceptions about de-dollarization
- De-dollarization narratives often misunderstand the complexity of the issue.
The story has a lot to say about de-dollarization.
— Brent Johnson
- The dollar’s status as the world reserve currency is due to private market preferences.
The dollar was the world’s reserve currency…because it was the fastest, cheapest, and most efficient.
— Brent Johnson
- Despite discussions among BRICS countries, the de-dollarization narrative lacks significant changes.
Very little progress has been made in de-dollarization… They haven’t done anything that actually has any significant consequences.
— Brent Johnson
The future of the US dollar
- The US dollar is expected to appreciate against other fiat currencies over the long term.
This will ultimately result in the US dollar appreciating significantly against other fiat currencies.
— Brent Johnson
- The strength of the dollar is not due to its own merits, but rather to the problems facing other economies.
The reason is not because the dollar is so strong, but because many other parts of the world are in trouble.
— Brent Johnson
- During a global crisis, the value of the dollar relative to other currencies may increase.
The rise in the dollar is…very important…it causes things to break.
— Brent Johnson
Stablecoins and their geopolitical implications
- The US will not allow stablecoins to undermine the dollar’s dominance.
The US is not going to sit idly by and let stablecoins take over and compete with the US dollar.
— Brent Johnson
- The United States is using stablecoins to expand its dollar network around the world.
This is precisely the way the United States is expanding its dollar network around the world.
— Brent Johnson
- The world may adopt USD stablecoins as the preferred medium of exchange.
The world has voluntarily adopted the USD stablecoin as its preferred medium of exchange.
— Brent Johnson
- Stablecoins could become a stealth weapon for the United States to exert power over other countries.
This is an excellent stealth weapon that the United States can use as a tool.
— Brent Johnson
Stablecoin Growth Potential
- The stablecoin market size could easily reach $3 trillion, with potential estimates reaching $10 trillion.
Estimates of 5 trillion to 10 trillion are not outside the realm of possibility.
— Brent Johnson
- Stablecoins could serve as a geopolitical tool for the United States to further control the global dollar network.
The US can use these stablecoins as geopolitical weapons.
— Brent Johnson
- The Silicon Valley Bank failure was heavily influenced by technology that allows for quick withdrawals.
This was a bank run enabled by technology…it was one of the main reasons why SVB collapsed.
— Brent Johnson
- Adoption of stablecoins in developing countries could accelerate the impact of the dollar milkshake theory.
This probably accelerates the violence of the dollar milkshake theory.
— Brent Johnson
Strategic use of stablecoins in times of crisis
- Stablecoins could enable rapid dollarization in countries facing currency crises.
They could dollarize the Venezuelan economy within days, if not weeks.
— Brent Johnson
- The technology behind stablecoins could significantly accelerate the process of dollarization.
The entire lifecycle can be completed in 48 hours instead of 48 days.
— Brent Johnson
- There is a possibility of a “stablecoin-style Arab Spring” where stablecoins could spark a revolution.
That’s a perfect example.
— Brent Johnson
- The military has established doctrine on using money as a weapon, which could be strengthened by new technologies such as cryptocurrencies.
This is an established principle…it makes sense to build on it with new technology.
— Brent Johnson
Geopolitical situation and economic strategy
- A global divorce between China and the United States is inevitable.
We are experiencing a global divorce between China and the United States.
— Brent Johnson
- The dollar is predicted to become the best of the worst fiat currencies in the future.
The dollar will become the best of the worst fiat currencies.
— Brent Johnson
- Investors should prefer the US market over international options as it carries less risk.
I will continue to support the United States and its markets over the rest of the world.
— Brent Johnson
- Owning gold is important as a hedge against declines in value.
It’s obviously important to have something that doesn’t lose value…I always encourage people to own gold.
— Brent Johnson
