The dollar milkshake theory pt. I

The dollar milkshake theory pt. I

In this three part series, we explore the impending sovereign debt crisis dubbed the dollar milkshake theory. Part one provides the background: the role of U.S. currency in global economic systems and the globe's debt problem. Part two outlines the dollar milkshake theory and what it means for fiat currency. Part three describes the role cryptocurrency could play if fiat currency fails.

There have been whispers of an upcoming recession for months now. We experienced an economic slow-down during the COVID-19 pandemic, but the economy seemed to bounce back as restrictions were lifted. Now, inflation is on the rise, interest rates are increasing and we are still facing supply chain issues.

What will this upcoming recession look like? Will it mirror the 2008 financial crisis or the 1970s era stagflation? Even worse, could we experience the economic conditions of the Great Depression?

Brent Johnson, Founder and Chief Investment Officer for Santiago Capital, proposes the dollar milkshake theory where the next financial crisis will actually bear resemblance to the 1990’s currency crisis in Asia. The dollar milkshake theory posits that the world is entering a sovereign debt crisis where fiat currency as we know it is set to fail. How did we get here? And what is the role of cryptocurrency in this theory? Let us begin with a brief history of fiat currency.

Fiat Currency

Precious metals, like gold, have been used for centuries as a store of value currency. They preserve wealth through their natural scarcity. Starting with the Bretton Woods agreement until the 1970s, countries including the United States, pegged their currencies to gold or to the dollar. However, in 1971, President Richard Nixon depegged the U.S. currency to gold, and the currency became backed by the trust of the U.S. government.

The US Dollar

Since the Bretton Woods agreement in 1941, the U.S. dollar has played the role of the world’s reserve currency. The U.S. dollar plays a crucial role in global economic systems.


The U.S. dollar is dominant in international trade: From 1999-2019, the dollar accounted for 96% of trade invoicing in the Americas, 74% in the Asia-Pacific region and 79% in the rest of the world. Europe is the only exception where the euro is dominant. In foreign exchange markets, dollars are involved in nearly 90% of transactions.

Store of value

Central banks and global financial institutions want to hold U.S. dollars and U.S. Treasury bonds because they are considered a safe-haven. Central banks hold around 60% of their reserves in U.S. dollars. In Q4 2021, $7.0 trillion of  marketable Treasury securities (33%) outstanding were held by foreign investors, both official and private. Private domestic investors hold 42% and the Federal Reserve system holds 25%, approximately. Foreign investors also hold around $950 billion in US paper banknotes – about half of US banknotes outstanding. The Eurodollar market, made up of U.S. dollar-denominated deposits at foreign banks or overseas branches of American banks, currently exceeds $5 trillion.


The U.S. dollar is dominant in international banking. About 60% of international and foreign currency liabilities are denominated in U.S. dollars.

Percentage of currencies in global foreign-exchange reserves
U.S. share of 2020 nominal world GDP compared to the dollar's share of globally disclosed foreign exchange reserves in 2020-Q4. At current exchange rates. Source: Federal Reserve.

Global Debt

Our currency system is not perfect and we are beginning to see cracks in its foundations, particularly when it comes to global debt. In Q1 2022, global debt climbed to a record-breaking $305 trillion, or 102% debt to GDP ratio. This increase is a legacy of COVID-19 when countries were borrowing heavily to keep their economy afloat. Entitlement programs have also compounded at massive rates. In 2022, entitlement spending in the U.S. amounted to around 46% of all government spending. In Q1, 2022 The United States and China borrowed the most: $1.5 trillion and $2.5 trillion, respectively.

Global debt in Q1, 2022. 

With such high sovereign debt and increased global liquidity, inflation abounds. As global growth is forecast to slow from 6% in 2021 to 3.2% in 2022, inflation is set to rise 8% in 2022 – a number not seen since the 1980s.

Annual inflation rate, Q1, 2022. 

So given the tremendous rise in global debt, why isn’t the U.S. dollar performing poorly in the midst of rising inflation and ever accruing debt? This is where the dollar milkshake theory comes in. The dollar milkshake theory posits that the sovereign debt crisis is harming all fiat currencies. However, the U.S. dollar is the “cleanest shirt in dirty laundry”. Simply put, the U.S. dollar is losing absolute value as a fiat currency, but the rest of the world’s fiat currencies are performing even worse. In addition, foreign governments use USD to pay off their U.S. dollar denominated debts – around 60% of all debt is in U.S. dollars. The dollar milkshake theory proposes the demise of all foreign currencies, where foreign currencies fall in value first increasing the demand for U.S. dollar, followed by an eventual collapse in the U.S. dollar itself. So initially we will see a dramatic rise in the US dollar relative to other currencies followed by an eventual collapse in the U.S. dollar relative to real or scarce assets like gold, oil, bitcoin, etc.

In part two of our dollar milkshake series, we will delve deeper into the theory and what it means for our global currency system. Part three will bring cryptocurrency into the fold. Stay connected and subscribe to read the next edition of the dollar milkshake theory.