Why The Dollar Milkshake Theory Explains America's Monetary Dominance

The financial world buzzes with predictions of America’s imminent economic decline. Yet history suggests we should be cautious about underestimating imperial power structures. This article examines the dollar milkshake theory—a framework that reveals why the U.S. dollar will likely remain the world’s dominant currency even as the global monetary system undergoes dramatic transformation.

The pattern is familiar. In the 1970s, when the gold standard collapsed in 1971 and inflation ravaged the economy, policymakers Nixon and Kissinger engineered a solution: they backed the U.S. currency with oil, creating the petrodollar system in 1973. This ingenious arrangement extended American monetary supremacy for five decades. Today, as similar structural pressures mount, understanding the mechanics of dollar dominance becomes essential.

The Architecture of Global Currency Imbalance

To understand the dollar milkshake theory, we must first recognize how the global financial system created massive structural imbalances. At the 1944 Bretton Woods Conference, economist John Maynard Keynes anticipated problems that would later materialize. When the world abandoned the gold standard without adopting a neutral reserve asset, Keynes foresaw the instability that would eventually haunt international finance.

The eurodollar market—where foreign banks hold trillions in dollar-denominated debt—exemplifies this imbalance. Unlike domestic dollars, eurodollars exist outside the U.S. financial system. Conservative estimates suggest tens of trillions in eurodollar exposure, though some calculations point to hundreds of trillions. This means more dollar-denominated debt exists outside America than within it.

Economist Robert Triffin identified this paradox in the 1950s: a currency serving as both domestic money and global reserve medium faces inherent contradictions. Countries borrowed heavily in dollars for development and trade, creating perpetual demand for U.S. currency. When economic troubles strike—recessions, export collapses, or commodity shocks—these nations must obtain dollars from foreign exchange markets to service their debts. During downturns, they often print their own currencies to purchase the dollars they desperately need.

How The Dollar Milkshake Theory Works In Practice

The dollar milkshake theory, formulated by analyst Brent Johnson in 2018, elegantly explains this dynamic. Imagine the global economy as a massive blender. Central banks worldwide have printed enormous liquidity—trillions of currency units—over the past decade. When financial stress emerges, capital flows follow a simple principle: money moves toward the safest haven.

The U.S. dollar becomes the “straw” in this metaphor—sucking up that vast ocean of global liquidity during times of uncertainty. This mechanism operates through a self-reinforcing cycle:

Stage 1: Financial stress strikes global markets. Emerging economies face currency pressure. Developed nations experience asset price declines.

Stage 2: Investors and institutions reposition assets toward perceived safety. Demand for U.S. dollars surges.

Stage 3: Countries holding dollar-denominated debt face devastating pressure. As the dollar strengthens against other currencies, their debt service becomes exponentially more expensive.

Stage 4: These nations must print more of their own currency to purchase dollars for debt repayment, accelerating their own currency devaluation.

Stage 5: The cycle intensifies. The stronger the dollar becomes, the more desperately other nations need it, creating a self-fulfilling prophecy.

This is precisely the dollar milkshake theory mechanism: structural imbalances force a cascade of currency devaluations, with the dollar absorbing liquidity from weaker currency zones. The U.S. Federal Reserve must continuously supply dollars to the world financial system—not as an act of generosity, but because the dollar’s international architecture requires constant liquidity expansion.

The Devastating Global Currency Collapse

Recent years illustrate this process vividly. The dollar index—measured against six major currencies (euro, yen, pound, Canadian dollar, Swedish krona, Swiss franc)—has experienced three major bull runs since 1971. Each time, the consequences ripple through emerging markets catastrophically.

Japan, traditionally viewed alongside the dollar as a safe-haven currency, exemplifies the problem. With debt-to-GDP ratios around 266%, the Bank of Japan maintains a balance sheet exceeding 1,280 trillion yen. Japan held $1.3 trillion in U.S. Treasury securities as of early 2022, surpassing even China as the largest foreign holder of American debt. Yet as the dollar strengthened dramatically over recent years, even Japan—the world’s safest developed economy after America—was forced to sell Treasury holdings to defend its currency.

China faced similar pressures. Both Tokyo and Beijing divested dollar reserves during the 2022 period when global dollar shortage intensified. The weaker yen subsequently pulled down the Chinese yuan, as it historically does. Other Asian exporters—South Korean won, Hong Kong dollar—faced comparable pressure. The Hong Kong dollar peg itself approached the breaking point at 7.85, threatening to collapse.

The euro, second-largest global currency, experienced even more dramatic devastation. The EUR/USD exchange rate broke a 20-year support level and fell below parity for the first time in two decades. Losing 20% of its value against the dollar within 18 months, the eurozone suffered from simultaneous banking fragility and energy crisis. The European Central Bank descended into crisis mode, with Christine Lagarde forced to launch new “anti-fragmentation” quantitative easing—essentially swapping German bonds for Italian bonds to prevent the currency union’s disintegration.

Emerging market nations experienced the most severe pain. Turkey, Argentina, and Sri Lanka confronted 80%-plus annual inflation rates. These countries epitomize how the dollar wrecking ball devastates smaller economies disproportionately. Unable to access dollar supplies, they printed their own currencies into worthlessness.

Capital Never Stops Flowing Toward Safety

Here lies a crucial insight often overlooked in doomsayer predictions: the U.S. dollar’s dominance does not stem primarily from American military might or geopolitical assertiveness. Rather, it reflects a mathematical reality of capital allocation.

Capital flows toward assets treated best. In a globally interconnected economy operating on fiat currency, the dollar offers characteristics other currencies cannot match:

• Largest, most liquid financial markets
• Rule of law and property rights protection
• Lowest credit risk among reserve currencies
• Deepest government debt markets
• Network effects (more participants drive further adoption)

Critics pointing to America’s $170 trillion in unfunded liabilities and record fiscal deficits miss a fundamental economics principle: supply and demand. Yes, U.S. deficit spending creates enormous dollar supply. However, global economic gravity pulls in the opposite direction.

An estimated $300 trillion in international economic activity circulates daily. This vast quantity of global transactions, investments, and trade settlements requires dollar-denominated clearing, settlement, and reserve holdings. The demand side vastly outweighs supply considerations. When every other currency depreciates or collapses, relative scarcity drives the dollar’s value higher regardless of American budget deficits.

The Paradoxical Bitcoin Narrative

Counterintuitively, Bitcoin adoption may accelerate dollar dominance rather than undermine it. Consider the feedback mechanism:

A strong dollar drives increased hyperdollarization. International investors and central banks accumulate dollar assets.

Hyperdollarization generates demand for Bitcoin and stablecoins. Dollar assets become scarce for ordinary users; they seek alternatives.

Stablecoin proliferation requires dollar reserves. Every stablecoin in circulation requires underlying dollar collateral.

This increased stablecoin adoption drives further dollar adoption. More participants enter the ecosystem requiring dollar settlement.

The mechanism creates a self-reinforcing cycle. Bitcoin adoption—should it accelerate toward a bitcoin standard—would paradoxically expand the dollar’s practical utility globally. Stablecoins would become the medium of exchange, with the dollar providing the underlying reserve. The U.S. benefits disproportionately from this arrangement.

What The Future Likely Holds

The petrodollar system, established 50 years ago, faces genuine pressures. BRICS nations and other emerging economies actively pursue alternative reserve currency arrangements. The structural inevitability the dollar milkshake theory describes will eventually unfold.

Yet predictions of imminent dollar collapse consistently underestimate global capital’s gravitational pull toward American financial assets. Of hundreds of currencies existing since 1850, most returned to their intrinsic value of zero. Currently, roughly 150 fiat currencies are depreciating in a competitive debasement race downward.

The dollar may eventually hyperinflate like all fiat currencies eventually do. However, the dollar milkshake theory suggests the U.S. will be the last fiat currency standing. Faced with global sovereign debt crisis, every nation will need dollars more desperately than dollars need them.

Could America play one final monetary wild card? History suggests empires do not fall into irrelevance—they restructure. The United States might become the first (and perhaps only) nation holding reserve currency status indefinitely by transitioning to a Bitcoin-dollar standard. The dollar milkshake theory framework, combined with Bitcoin’s potential integration, offers a compelling explanation for why American monetary dominance may prove far more resilient than contemporary predictions suggest.