The Podcast of the Lotus Eaters - July 29, 2025


PREVIEW： Brokenomics ｜ Dollar Milkshake Theory with Brent Johnson


Episode Stats

Length

22 minutes

Words per Minute

170.51103

Word Count

3,876

Sentence Count

235


Summary

In this episode of Brokonomics, Brent Johnson of Santiago Capital joins me to talk about the Dollar Milkshake Theory, a theory that argues that if the dollar were to fall, it would actually strengthen against all of its fiat peers.


Transcript

00:00:00.000 Hello and welcome to Brokonomics. Now we've talked about the death of fiat money many times in this
00:00:05.460 series, but there is a version perhaps where on its road to its death it actually strengthens.
00:00:11.920 Imagine if you will, daft government overspending faces off against Obi-Wan Dollar and Obi-Wan
00:00:18.680 Dollar says, strike me down but I'll become more powerful than you can possibly imagine.
00:00:23.680 Now to explain what's going on there, we've got Brent Johnson of Santiago Capital. Brent,
00:00:28.580 thank you very much for coming on. Thanks for having me. This should be fun.
00:00:32.720 Absolutely. So you're very well known for the dollar milkshake theory. Can you tell us what
00:00:40.460 that is? And also a side question to that is, do you actually like the answer you got from your own
00:00:46.680 theory? Two good questions. So first of all, the theory is that for many reasons, some of them
00:00:55.640 undeserved and some of them undeserved, the United States dollar, while perhaps it is a horrible
00:01:01.480 currency overall, it's better than all the others. And for many, many reasons, as we move forward in
00:01:09.380 time and the debts become a bigger problem and geopolitical discourse tends to fall, I think the
00:01:16.660 dollar would get stronger. And as a result, the United States and the U.S. dollar itself would suck
00:01:24.380 up capital from the rest of the world. And so while the dollar may lose value against real things,
00:01:32.080 it would gain substantially against all of its fiat peers. And the reason is because the entire world
00:01:39.320 has an incredible amount of U.S. dollar debt. It's not just the United States. I think everybody
00:01:45.020 knows the United States owes something like $37 trillion. And that's if you just include the
00:01:50.600 national debt. If you include corporate and other obligations, it's probably $100 trillion.
00:01:57.360 But what most people don't know is that the rest of the world owes an equal amount in U.S. dollars.
00:02:02.900 And they can't print it to serve it. And so as it gets stronger, it causes them a lot of pain.
00:02:09.460 And when it causes them a lot of pain, bad things happen to their economies. They have to print even more
00:02:14.680 of their local currency to deal with it, which makes their local currency fall even more.
00:02:20.240 And so the theory is that while fiat may come to an end, it's a rising dollar versus its peers
00:02:27.540 that brings fiat to an end, not a falling dollar. And so if you see the DXY falling or the dollar-euro
00:02:34.500 rate falling, that's an indication that the system is working, that the system is perpetuating itself.
00:02:41.060 It's only when it goes higher that things start to break and we get real de-dollarization
00:02:45.900 because it's forced de-dollarization via defaults and a lot of pain.
00:02:51.920 And the short answer to your second question is, no, I don't like the results that I came up with.
00:02:59.160 And in fact, when I kind of figured this out, I don't know, six, seven years ago now,
00:03:03.920 part of the reason I knew I was on the right track is I hated the answer.
00:03:09.560 I didn't think it was fair. I didn't think it was right, so to speak. But every time I just
00:03:16.600 took off my biased wants and desires and just looked at the cold, hard facts of it,
00:03:22.680 this is the answer I kept coming back to. And in my business, which is the investing business,
00:03:29.100 you kind of have to treat the world as it is, not as you want it to be. And so that's what the
00:03:36.480 milkshake theory was, or is, and that's kind of my thoughts on it.
00:03:42.280 So, I mean, you said something interesting there. You talked about how a rising dollar,
00:03:47.880 that feels more like the end game of this, but a falling dollar is, I don't know,
00:03:53.440 redollarization or something. That is, I suppose the mechanism there is that if the dollar is
00:03:58.980 falling, it's because of the rest of the world is generating these dollars and nominated debts,
00:04:04.600 which is feeding into this system, which is extending it.
00:04:08.980 That's correct. So in the type of system that we currently have, and this is globally,
00:04:12.980 it's not just in the United States, money is loaned into existence. So, you know, the central bank
00:04:19.420 of the United States can create reserves, but they don't create the loans that then create deposits
00:04:26.700 that then create demand for the money. And the interesting thing is that 50 years ago,
00:04:35.260 when the United States went off the gold standard, there was probably a brief period of time
00:04:39.880 where the rest of the world could have decided to reject the dollar and move back to gold on its
00:04:46.120 own or some kind of other hard backed commodity backed money. But they didn't. And in the,
00:04:54.340 in the period of time that they didn't do that, the United States, you know, came to an agreement
00:04:58.640 with Saudi Arabia that they would price all their oil in dollars. And that forced the rest of the
00:05:04.360 world to once again, need dollars. And rather than fight it, it actually turbocharged what's known as
00:05:13.080 now the euro dollar market. So dollar denominated credit, dollar denominated transactions, dollar
00:05:19.040 denominated savings, however you want to describe dollars that exist outside the United States,
00:05:24.200 those are called euro dollars. And with the, with the on, on, with the on ramp of the Saudi Arabia
00:05:31.460 oil for dollars scheme, it turbocharged the growth of that euro dollar market. And in the subsequent 50
00:05:38.340 years, that's what, that's, what's led to all of this, you know, euro dollar credit based in US
00:05:43.240 dollars that sits outside the United States. And, and I should say that, that those euro dollar loans
00:05:49.420 and credit that's been, that is not owed to the United States. So if, if it were to be defaulted on,
00:05:56.260 they're not defaulting on the United States, they're defaulting on each other because it's the rest of the
00:06:00.380 world transacting with each other in US dollars. So if, if somehow that debt were defaulted on,
00:06:07.360 they would be defaulting on the asset of one of their other non-US entity peers.
00:06:14.380 And, and that's, that's where this pain would come from. And I would argue that would be de-dollarization.
00:06:20.960 Yes, I suppose the implication of that is that there's, if, if these are dollars that are, are not going to
00:06:27.220 impact the US, therefore the US fulfills, doesn't necessarily feel under any obligation to bail out
00:06:32.800 this system. That's right. Well, I wouldn't say there's no obligation, but they're going to bail
00:06:40.400 out themselves before they bail out the rest of the world. So there would be an order in which
00:06:45.380 the bailouts would happen. And there is no obligation that they have to bail out the rest of
00:06:50.380 the world. Now they typically have, but I think Trump coming into power changes that calculus a little
00:06:56.080 bit. I'm not saying that he won't do it. But it's perhaps not as certain as it was before.
00:07:03.300 And there's actually been many articles, many interviews given on this exact topic where European
00:07:08.860 monetary authorities are worried about the amount of dollar credit that exists in the European banking
00:07:16.040 system, the exposure to US dollars and the fear that the US may not provide the liquidity in dollars
00:07:22.640 that they typically have. So I'm glad you touched on the euro-dollar market because I wanted to come
00:07:27.620 to that. And just for the audience, euro-dollars has nothing to do with the currency of the euro.
00:07:32.800 It's dollar obligations that are created somewhere else, such as in Europe. That's the name euro-dollars.
00:07:40.200 I think a lot of these obligations are actually created in London. That's a very big market for
00:07:43.440 these things. But it literally just means dollar-denominated obligations are created anywhere
00:07:47.540 outside of the US. That's the euro-dollar market. But given that, given the euro-dollar market,
00:07:52.640 it gives the US a sort of permanent free lunch card that allows them to get away with ever higher
00:07:59.780 deficits, this easy issuance of debt. And then the effect of that down the line is that it ends up
00:08:09.520 exporting the value chain. Because you need to run this system where something of value is produced
00:08:14.680 outside the US. The US produces pieces of paper with the president's face on dollars, and then
00:08:22.000 they swap them over, which implies that the rest of the world is always going to be able to find a way
00:08:28.500 to create value outside. And so effectively, what you're doing is you're exporting the productive
00:08:34.060 part of your economy outside of the US in order so that this cycle can continue. You can keep swapping
00:08:39.780 dollars for it. And it sounds great at first, but if you look at it, it's perhaps more like a
00:08:45.720 Faustian pact. It's like the US founders of the sort of post-war Bretton Woods systems signed up to
00:08:53.460 this Faustian pact where it's like, okay, we will have whatever it is, 50 years, 75 years of being able
00:08:59.940 to have enormous hegemony, run whatever deficits we like. But the cost is that all of your productive
00:09:09.640 value chain is going to get moved outside of the US. So it's great for the US, but only up to a point.
00:09:16.260 I think that's right. And I think we've reached the point where at least one guy that we all are aware
00:09:24.440 of named Donald Trump has said enough is enough. And I think there's enough people in the United
00:09:29.760 States who agreed with him that said enough is enough. And that's why he became president.
00:09:35.600 And so going back to your point that there is no obligation for the US to supply this credit to the
00:09:42.600 rest of the world. I think that is probably, I don't know if it's going to stop, but it's perhaps not
00:09:50.260 going to be provided as easily as it once was. And where there may have been some covert strings
00:09:56.380 attached to that, you know, given liquidity in the past, I think those strings will now be overtly
00:10:02.020 stated and very publicly stated in some cases. And that process of moving back. So the pendulum
00:10:11.760 swung all that way. And as it now swings back, I don't think that that will be a, let's just call it
00:10:16.760 a non-volatile process. I think it will be a very volatile process. And I think it is a problem for
00:10:22.560 the United States. And so I don't want people to think that I am Pollyannish about the effects of
00:10:28.680 the United States. That's not my, that's not the whole point of the theory. The theory is that
00:10:32.660 the United States will still get hurt, but the rest of the world will, in my opinion, get hurt more
00:10:39.480 than the United States in this volatile process. Because while the U.S. has many of the same
00:10:47.700 problems that the rest of the world has, the U.S. has many advantages that the rest of the world does
00:10:53.760 not have. And the, perhaps the biggest one is the ability to print liquidity, which is the point that
00:11:00.960 you just made. No, no one else has the ability to print the liquidity. So let me, let me give you an
00:11:06.460 example. And let's use 2022 as an example, because that was a fairly extreme year with regard to
00:11:13.660 interest rates. In 2022, the Federal Reserve took interest rates from basically zero to 5% over a
00:11:22.540 nine-month period. You know, I don't want to say it had never happened before in history, but it's
00:11:28.260 certainly one of the fastest tightenings of monetary policy in history. And during that time period,
00:11:35.040 the U.S. struggled a little bit. You know, markets were off 20, 30% during that time period.
00:11:41.800 There was a lot of volatility. There was a lot of uncertainty. The interest rates started to rise
00:11:47.760 on the long end as well. And so that was going to cost more to finance the U.S. debt. But in that same
00:11:53.680 year, Italy's bond yields blew out so much that the ECB had to set up a special facility to buy Italian
00:12:01.040 bonds. The Bank of England had to bail out their guilt market because it was collapsing.
00:12:09.040 The Bank of Japan had to bail out both the yen market and their government bond market.
00:12:14.600 And that was the year where China's real estate collapse really picked up speed. And that can all
00:12:21.660 be very highly correlated to the rising dollar because the dollar went from, the DXY index went
00:12:27.040 from, I don't know, let's call it 102 to 112 over a six-month period. And that caused a lot of chaos in
00:12:35.320 the world. And the U.S. is the one who was able to take the pressure off. No one else could take the
00:12:44.820 pressure off themselves. It was ultimately when Powell stopped raising rates and they started saying that
00:12:51.460 we've probably tightened enough and now we will be looking to potentially ease at some point, that's
00:12:56.940 when everybody was able to take a breath. And I would argue and have argued this several times that
00:13:03.520 while the raising of interest rates by the United States was certainly done in order to combat the
00:13:10.440 rampant inflation that was causing political problems domestically, I think it was also done,
00:13:18.160 or at least it was known that doing it would cause problems for the rest of the world and it would
00:13:23.020 put the rest of the world under a lot of pressure. And it's a way for the U.S. to re-exert
00:13:28.700 their hegemony and set up new deals and make everybody choose a side, for lack of a better way of saying it.
00:13:37.900 And I think it was a reminder to the world, at least the financial authorities, that there's one central
00:13:48.600 bank that sits above all others. And it's not even close. And again, I don't necessarily like this,
00:13:54.080 but this is reality of the way the system is designed.
00:13:58.100 Yeah. I mean, you touched on Trump there. I'd be interested to get your opinion on the recent
00:14:03.500 tariff situation because when that occurred, my thinking on it was, okay, yes, there is the
00:14:11.260 manufacturing argument about bringing that on shore. That was the domestic narrative that was
00:14:15.200 played out because that was the one that had the strongest support. There was also the military
00:14:20.600 procurement argument, which is, okay, look, the U.S. should have the option to be able to fire a
00:14:26.700 missile at China without that missile supply chain being dependent on China. So I get that element
00:14:33.380 as well. But another big element, which wasn't really talked about anywhere outside of a small
00:14:40.720 financial circle, was that the U.S. had a strong need to get the dollar down. And the reason for that
00:14:50.240 is that this year in particular, a little bit of next year, the U.S. has a big need for liquidity.
00:14:57.720 It's got a lot of debt to recycle overwards. And if the rest of the world was choking because
00:15:04.380 the dollar was too high and it's got all of its dollar debt, then that means it can't refinance
00:15:10.680 that debt without absorbing most of its capacity. But if the dollar comes lower, that frees up capacity
00:15:17.840 that can then, after they've done their debt, their dollar denominated debts, that liquidity
00:15:23.600 can then float back into the U.S., which will help the U.S. And so I thought at the time that a big
00:15:29.440 unstated reason for it was a drive to get DXY lower. And it's kind of done exactly that. DXY went from
00:15:36.520 something like 110 to whatever it is now, 97, something like that today. I mean, is that something
00:15:44.100 that you see? And what was your whole take on the tariff thing? So, yeah, I do think there was
00:15:48.720 some of that. And this is where what the Trump administration wants and what they get will
00:15:55.120 probably end up being two different things. And also where some of their policies conflict with
00:16:00.220 each other. But the short answer is, yes, I do think they wanted, I think they wanted interest rates
00:16:06.740 to come down. The interest rates haven't come down. But I think the dollar has come down in
00:16:12.540 anticipation of the fact that they think interest rates will be coming down. So markets often move
00:16:18.340 on anticipation. And Trump clearly wants lower interest rates, both on the short end and the
00:16:24.740 long end. And part of the reason is because they do need to refinance all this debt. And it's easier
00:16:33.920 to do, it's easier to refinance the debt, especially to get foreigners to buy the debt if the dollar is
00:16:41.620 weaker. Because if the dollar is weaker, their currency is stronger. That's one reason it's
00:16:45.960 easier. And then it's also, if they can refinance at a lower interest rate, it saves them interest
00:16:51.480 payments in the future. Now, one thing I would say with regard to this is, while it helps
00:16:57.700 refinancing with interest rates being lower and the dollar weaker, I don't think it has to happen.
00:17:05.660 In other words, I think the US could still refinance at even higher rates. And while that
00:17:11.600 would be a problem, I think it would be a bigger problem for the rest of the world. And I think for
00:17:17.640 two reasons. Because I think in many ways, and I know some people will not like me saying this,
00:17:23.760 but I think in many ways, foreigners buying treasuries is a form of tribute to the king.
00:17:30.600 Right? It's not stated as such, but I think there is some behind the scenes. I think that's
00:17:36.360 kind of what it is, or at least to a certain degree. And not only that, but I think the US at
00:17:44.060 the end of the day, the Fed could go back to doing QE if they wanted to. They could drop rates to make
00:17:50.220 it easier. They could buy the bonds that the Treasury is issuing. And I know many people will
00:17:57.140 say, but yes, that will kill the dollar. Okay, well, maybe it will. But doesn't Trump want a lower
00:18:01.380 dollar? Right? But my point would be is if rates were higher, and they had to refinance at higher
00:18:08.520 rates, I would argue that the rest of the world would just have to deal with it. And they would have
00:18:13.880 to buy those treasuries at higher rates. Because remember, the Treasury, US Treasuries and the US
00:18:18.320 dollar underlies the entire system. If you're going to operate on the global stage as it is today,
00:18:25.120 and this could potentially change in the future, but if you want to act on the global stage today,
00:18:29.420 you need dollars and US Treasuries are the collateral off of which those dollars are loaned
00:18:36.360 into existence. The other thing is if the US has to refinance at these higher rates, yes, that's bad
00:18:44.060 for the United States. But then the rest of the world gets priced off of the US Treasury. Now,
00:18:49.600 perhaps not these other sovereigns, but global corporates get priced off of the US 10-year rate.
00:18:57.460 So if you've got a US 10-year bond, let's say the interest rates go higher. Let's say the 10-year
00:19:02.180 goes to 6%. It's pretty high. But what does a Brazilian corporate now have to pay to raise money?
00:19:09.620 Right? What does Turkey have to pay to raise money? What does Australia have to pay and Canada have to
00:19:15.580 pay? Canadian corporations do. Because if you can buy a Treasury, which you have to have anyway,
00:19:21.300 and it pays you 6%, you're going to need something paying higher than that to move out on the risk
00:19:27.820 reward scale. Right? Now, I'm not saying the Treasuries are risk-free. I think that's a misnomer
00:19:34.120 that has been perpetuated. Somewhat of a myth. Well, I will have to know that I've done many
00:19:40.440 financial exams where the correct answer to a question like that is, yes, the Treasuries and
00:19:46.720 gilts are risk-free. That was the right answer to get through the exam. And listen, and that's the
00:19:53.460 thing. Is it ridiculous? Yes, it's ridiculous. But it's also the world in which we live. Right? And I
00:19:59.200 think it's important. And the other thing is, I think what people forget, often, I deal with a lot
00:20:04.340 of individuals. I deal mainly with retail investors. And I will often talk to people who
00:20:11.080 will say, well, I would never buy a government bond yielding 5% because it will get inflated away. And
00:20:17.200 that's fine. It's solid logic. But investing is not really about figuring out what you would do.
00:20:24.720 Investing is about figuring out what the rest of the world's going to do,
00:20:27.180 what their motivations, what their goals are. Why would they buy a treasury? And the fact is,
00:20:31.840 is that banks around the world, they're not buying based on absolute value. They're buying based on
00:20:38.520 a spread. They're going to buy a bond that pays them this much, 6%. And then they're going to pay
00:20:45.440 their customer 4% or 3%. And they're going to make the spread. And that's a very simplistic example.
00:20:51.920 But the point is, is, I think oftentimes, when people say, the US government cannot finance itself
00:20:59.680 at 6%, they're basing it on the fact that they wouldn't buy the bond. But you need to do a better
00:21:06.080 understanding of who else would buy the bond and why they would buy the bond and how many of the
00:21:09.920 bonds they would buy. And I think once you start going down that road, you realize that while there's
00:21:14.960 several problems that the US has to deal with, you know, the rest of the world has those as well.
00:21:21.620 And let me make one more point while I'm on this topic is that, you know, as interest rates rise,
00:21:28.960 US treasury prices fall, right? And so people will show the US treasury bond is no longer a store of
00:21:35.780 value. And they'll say, well, what would happen if nobody bought the bonds? The bonds would crash.
00:21:40.260 Okay, let's play that out. Because that is true. Is that singularly bad for the United States? Well,
00:21:47.880 when you consider that every central bank in the world holds treasuries on their balance sheet,
00:21:52.420 and every commercial bank around the world holds treasuries, not every bank, but most of them
00:21:57.120 hold treasuries. If those treasuries now go to zero, because nobody will buy them, then that means the
00:22:03.600 balance sheets of those central banks and all of those commercial banks outside the United States are now
00:22:08.560 impaired as well. And remember, the US can recapitalize its balance sheet with a stroke of
00:22:14.160 a pin, and the rest of the world cannot. So when you start looking at things on a relative basis,
00:22:20.620 rather than an absolute basis, I keep coming back to the conclusion that while it's not a good
00:22:26.180 situation, I think the US is better off, despite all its problems than many of the other of its
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