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What the Dollar Milkshake Theory Means For Crypto | Alexandria

 The dollar milkshake theory is the Samuel L. Jackson of forex theory: the dollar drinks another currency's milkshake and shoots it in cold blood.
Just kidding, this theory has been one of the main macro narratives in 2023. That's why this article looks at:
  • What is the Dollar Milkshake Theory and where it comes from.
  • How it works and whether we are already involved.
  • What the theory means for Bitcoin and Ethereum.
What the Dollar Milkshake Theory Means For Crypto | Alexandria

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What Is the Dollar Milkshake Theory?

The dollar milkshake theory is a framework for sovereign debt crises. It explains why the U.S. dollar will strengthen against other fiat currencies and predicts that the U.S. dollar will “suck liquidity” from other fiat currencies, like the proverbial milkshake.

How does the dollar milkshake theory work?

Let's explain it using two hypothetical countries: Bankruptia and Thriftistan.
Bankruptcy is a country of extravaganceLikes to live within our means and take on debt. It also has a history of defaulting on its debt. Therefore, Bankruptia has a weak currency that investors do not trust.
 Thriftistan In many ways it's the opposite. It has a high savings rate, and while it also incurs a lot of debt, it always pays it back on time. Thriftistan has a good reputation among investors and a strong currency.
The two have one thing in common: They've both been heavily indebted over the past few decades. But while Thriftistan can borrow in its strong currency, Bankruptia often has to rely on U.S. dollar borrowing due to its poor "credit score."
One day the United States will start raising interest rates. That increases Bankruptia's borrowing costs -- it has to pay more interest on dollar-denominated debt. But Thriftistan is feeling the impact, too: Investors who would normally buy its bonds now have a more attractive option -- They can buy US sovereign debt (the "safest" debt).
Ultimately Bankruptia followed its track record and collapsed under the weight of debt payments and defaults. Thriftistan didn't, but investors rushed to get out of its currency, investing in U.S. debt that weakened its currency in the process.
This is a rough example of how the dollar milkshake theory can explain and predict fiat currency weakening against the dollar. Both Bankruptia (similar to Argentina) and Thriftistan (similar to Japan) have felt the effects, although their circumstances are different. Based on experience: The worse a currency's credit history is, and the more dependent a country is on the dollar, the more likely its currency will depreciate.

Where did the dollar milkshake theory come from?

Brent Johnson, founder of investment fund Santiago Capital, is the brains behind the theory.

Johnson's theory is based on:

a) the long-term debt cycle.

b) Debt and asset pricing is highly dependent on the US dollar.

Countries have good and bad incentives to increase debt:
  •  Good incentives Debt is being used for productivity-enhancing investments, such as education.
  •  Bad incentives Debt is being used to pay for less productive causes like Social Security.
Ultimately the states will need to repay this debt. They can do this through austerity policies that save more than they spend, or by raising new debt to pay off old debt. Austerity is unpopular because it hurts: sooner or later countries always choose to pay their debts. When debt gets too big to Countries repaying their debts inflate or default on their currencies: this is the end of a long-term debt cycle.

Since the U.S. dollar is the most liquid and trusted fiat currency, it is widely used outside the United States. For example trade invoice investment or financing (debt).

This record of liquidity and trust is so great that even neighboring countries may use dollars rather than local currencies when transacting with each other. For example, African countries mostly invoice their exports in US dollars even when they trade with other African countries.

How does the dollar milkshake theory work, and are we already in it?

Taking a quick look at USD strength in 2022, you might conclude that the theory is already at work:

However, Brent Johnson himself said that the theory would take two to five years to play out and lead to a sovereign debt crisis. A strong dollar would destroy the system, as even rich countries like Japan or the EU bloc would face unprecedented currency crises. imagine a situation like this In Bankruptia, Bankruptia is Japan. The impact on the global economy could be catastrophic.
In addition, Johnson insisted that there is nothing the rest of the world can do about a stronger dollar. Only the United States has the right to devalue its currency. According to him, Fed Chairman Jerome Powell wants his legacy to be inflation under control so the U.S. can live with The dollar strengthened.
Are the consequences of a soaring dollar really that bad?
 Yes  Johnson predicts that if the theory holds true at all, the rest of the world will collapse. To some extent, we can already see this happening in these two countries, which serve as models for our interpretation. Argentine peso and yen both weaken sharply against dollar Dollar:
However, Johnson expects more confusion as the theory develops. Examples are:
  • Sovereign debt defaults.
  • Large stock markets plummet (e.g. in Europe).
  • Swap lines are expanding (swap lines are agreements between central banks to exchange currencies with each other).
He also wants countries to monetize their debts (= money printer go brr). Japan is already doing this, artificially keeping debt repayments low and tolerating currency debasement.
With the U.S. dollar so liquid and many assets outside the U.S. denominated in U.S. dollars, Johnson doesn’t think it’s possible to get around debt monetization without a massive crash. His long-term prediction is that the dollar will be the last to fail. the rest of the world do anything to prevent this from happening Because of the global dependence on the dollar, the game will fail.

While some countries are working to reduce their reliance on the dollar in areas such as trade invoicing and commodity pricing, the hegemony of the dollar in terms of investability (= storing savings) and financing (= access to credit) will not be challenged anytime soon. On the contrary, restricting firms and Personal access to dollar liquidity only increases the attractiveness of the dollar and leads to more short-term volatility. The rate of cryptocurrency adoption in developing countries like Nigeria and Vietnam is a testament to this.

But most importantly and interestingly for cryptocurrency investors, Johnson predicts that the price of hard assets will rise as the theory goes. Liquidity fleeing a weak currency has to go somewhere - preferably a solid store of value.

What the Dollar Milkshake Theory Means for Bitcoin and Ethereum

While cryptocurrencies especially Ethereum and ERC-20 tokens such as stablecoins aim to improve the existing financial trajectory, Bitcoin and its community have declared war on the traditional financial system. This Could Mean the Dollar Milkshake Theory Influences Bitcoin and Others Cryptocurrencies are different.


A sovereign debt crisis would be bad for Ethereum as it would likely cause liquidity to gush out of risky assets. You could argue that stablecoins benefit from the influx of liquidity into dollars — and you might be right. However, no further use is required These stablecoins serve only as a store of value.
So as long as the stablecoin sees little further real-world usage, Ethereum itself won't benefit much from it .Since you need ETH to trade ERC-20 tokens, more demand for stablecoins as a medium of exchange increases the demand for ETH to pay for gas — and increases its price. But as long as stablecoins are simply a more popular store of value than emerging market currencies, ETH will only benefit reluctantly. Ironically, this is the same store-of-value vs. medium-of-exchange conundrum that Bitcoin faces.
The best-case scenario for Ethereum is increased adoption of cryptocurrencies, especially dollar-denominated stablecoins as a medium of exchange in the real world. This may require cooperation with governments and large corporations - the crypto community is allergic to this arrive. However, with some kind of "government approval" of the technology, cryptocurrencies could suffer from any type of economic crisis.


No matter how much the community wishes the opposite to be true, Bitcoin remains a risky asset. Therefore, the sovereign debt crisis may also be negative for its valuation. Even a short-term influx into BTC may just be a bridge for liquidity into USD. Although Bitcoin's Digital scarcity is real Market feedback has been clear: when the economy goes into crisis mode, BTC prices drop.
This assumption has a simple invalidation: if BTC appreciates against non-USD currencies during a sovereign debt crisis, it would indicate that Bitcoin is becoming the hard money it aspires to be. As Bitcoin plans to replace or at least compete with the U.S. dollar in the long-term, both as money and storage Emphasis on the emergence and adoption of a parallel economy based on Vitcoin is a prerequisite for its success.

Could the dollar milkshake theory be wrong?

But what if Brent Johnson is wrong? What if the dollar milkshake theory has peaked and we are headed for dollar weakness? After all, since the beginning of November 2022, the strength of the dollar has been retreating:

There is a competing theory that calls for the dollar to weaken over the next few years in favor of commodities and hard assets like Bitcoin. It's called Bretton Woods III, and you can read about it here.
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