The Podcast of the Lotus Eaters - PREVIEW： Brokenomics ｜ Dollar Milkshake Theory with Brent Johnson

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. 0.83

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 0.67

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 0.96

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

00:22:34.860 competitors. If you would like to see the full version of this premium video, please head over

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The Podcast of the Lotus Eaters - July 29, 2025

PREVIEW： Brokenomics ｜ Dollar Milkshake Theory with Brent Johnson

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