Key takeaways
- The desire for dedollarization exists but is complex to achieve.
- The Dollar Milkshake Theory outlines how sovereign debt crises impact markets.
- US assets are predicted to outperform due to superior market structure.
- Central banks have managed to prevent a sovereign debt crisis so far.
- A currency crisis is inevitable due to the monetary system’s design.
- Central banks’ primary role is to perpetuate the state by acting as lenders of last resort.
- The system’s design mandates growth, making gradual unwinding unlikely.
- A crisis is inevitable, but its timing is uncertain due to potential growth from technology.
- Betting against central banks’ ability to manage challenges is risky.
- The dollar has significantly impacted other reserve currencies since 2021.
- The world is more dependent on the US dollar today than ever before.
- The euro dollar network is the largest for dollar-based transactions outside the US.
- The narrative around dedollarization often misunderstands the complexity of the issue.
- The dollar’s status as the global reserve currency is due to private market preferences.
- The US dollar is expected to strengthen against other fiat currencies in the long term.
Guest intro
Brent Johnson is CEO of Santiago Capital, an investment firm focused on macro strategy and capital allocation. He developed the Dollar Milkshake Theory in 2018 to explain how the US dollar absorbs global liquidity during debt crises, a framework that has guided his analysis of currency markets and capital flows over the past several years. Johnson has become a prominent voice on the structural dynamics of the dollar-based monetary system, including the role of the Eurodollar market and how emerging technologies like stablecoins may reshape dollar hegemony.
The complexities of dedollarization
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There’s no question that there is a quote unquote desire for dedollarization… but the ability to actually do it is dramatically different than the desire to do it
— Brent Johnson
- The geopolitical implications of the US dollar as the global reserve currency create challenges for dedollarization.
- The Dollar Milkshake Theory provides a framework for understanding how debt crises affect markets.
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The dollar milkshake theory was really a framework for how I thought a sovereign debt crisis would affect markets and asset classes
— Brent Johnson
- US assets are predicted to outperform due to their market structure.
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I thought the US dollar would go higher… that’s essentially what has played out from a directional standpoint but we never got the crisis.
— Brent Johnson
- Governments and central banks have managed to prevent a sovereign debt crisis so far.
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They’ve been able to keep the plates spinning, kick the can down the road, and here we are.
— Brent Johnson
The inevitability of a currency crisis
- A currency crisis is inevitable due to the monetary system’s design.
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It is a mathematical certainty that we will have a crisis… because of the design of our monetary system.
— Brent Johnson
- The monetary system requires constant growth due to interest on loans.
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A system that loans money into existence has to grow… there’s never enough money to pay off all the loans plus the interest.
— Brent Johnson
- The primary role of central banks is to perpetuate the state by acting as lenders of last resort.
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Their job is to step in and kick the problem down the road.
— Brent Johnson
- Gradual unwinding of the system over a long period is unlikely.
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The design of the system mandates growth.
— Brent Johnson
The role of central banks in economic stability
- Central banks must prevent economic contraction and stimulate growth.
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They have to keep it from contracting and do it in a way that not only stops the contraction but then starts it to expand again.
— Brent Johnson
- A crisis is inevitable, but its timing is uncertain due to potential growth from technology.
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If we have some kind of productivity boom… perhaps they can kick this thing down another five, ten, fifteen, twenty years.
— Brent Johnson
- Betting against central banks’ ability to manage challenges is risky.
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Those who continually bet against the central bank’s ability to kick the can down the road… are doing themselves a disservice.
— Brent Johnson
The dollar’s impact on global currencies
- The dollar has significantly impacted other reserve currencies since 2021.
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The dollar has been a wrecking ball… it did drink the milkshake of other reserve currencies of the world since 2021.
— Brent Johnson
- There is a growing desire for dedollarization globally.
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There is no question that there is a quote unquote desire for dedollarization.
— Brent Johnson
- The world is more dependent on the US dollar today than ever before.
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The world is more dependent upon dollars today than it ever has been in the past.
— Brent Johnson
- The euro dollar network is the largest for dollar-based transactions outside the US.
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The euro dollar network… is the biggest network in history.
— Brent Johnson
Misunderstandings about dedollarization
- The narrative around dedollarization often misunderstands the complexity of the issue.
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There’s a lot made about the dedollarization from a narrative.
— Brent Johnson
- The dollar’s status as the global reserve currency is due to private market preferences.
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The dollar was the global reserve currency… because it was the fastest, cheapest, most efficient.
— Brent Johnson
- The narrative of dedollarization lacks material change despite discussions among BRICS nations.
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There’s been very little dedollarization that has gone on… they’ve never actually done anything of material consequence.
— Brent Johnson
The future of the US dollar
- The US dollar is expected to strengthen against other fiat currencies in the long term.
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This will ultimately end in the US dollar going much higher versus other fiat currencies.
— Brent Johnson
- The dollar’s strength is not due to its own merits but rather the troubles faced by other economies.
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The reason is not because the dollar is so great but because so many other parts of the world are in trouble.
— Brent Johnson
- The dollar’s value relative to other currencies can rise during global crises.
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The dollar going higher… is incredibly important… it’s what causes things to break.
— Brent Johnson
Stablecoins and their geopolitical implications
- The US will not allow stablecoins to undermine the dollar’s dominance.
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The United States will not just sit by and let stablecoins take over everything and compete with the US dollar.
— Brent Johnson
- The US is using stablecoins to extend its dollar network globally.
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It’s really a way for the United States to extend the dollar network throughout the world.
— Brent Johnson
- The world may adopt US dollar stablecoins as the preferred medium of exchange.
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The world voluntarily adopts the US dollar stablecoin as the preferred medium of exchange.
— Brent Johnson
- Stablecoins can be a stealth weapon for the US to exert power over other nations.
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It’s a great stealth weapon that the United States can use as a tool.
— Brent Johnson
The potential growth of stablecoins
- Stablecoins could easily reach a market size of $3 trillion, with potential estimates going as high as $10 trillion.
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The estimates for 5 to 10 trillion are not out of the realm of possibility.
— Brent Johnson
- Stablecoins can serve as a geopolitical tool for the US to exert more control over the dollar network globally.
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The United States can use these stablecoins as a geopolitical weapon.
— Brent Johnson
- The collapse of Silicon Valley Bank was significantly influenced by technology enabling rapid withdrawals.
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This was a bank run enabled by technology… that was one of the main reasons why SVB collapsed.
— Brent Johnson
- The adoption of stablecoins in developing countries could accelerate the effects of the Dollar Milkshake Theory.
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This accelerates the perhaps the violence of the Dollar Milkshake Theory.
— Brent Johnson
The strategic use of stablecoins in crisis situations
- Stablecoins could enable rapid dollarization in countries facing currency crises.
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They could dollarize the Venezuelan economy within a few days if not a few weeks.
— Brent Johnson
- The technology behind stablecoins can significantly accelerate the process of dollarization.
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You can go through the whole entire life cycle in forty-eight hours rather than forty-eight days.
— Brent Johnson
- The potential for a ‘stablecoin style Arab Spring’ exists, where stablecoins could catalyze revolutions.
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It is a perfect example.
— Brent Johnson
- The military has established doctrines on using money as a weapon, which can be enhanced by new technologies like crypto.
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This is established doctrine… it’s not a stretch to then put a new technology on top of that.
— Brent Johnson
The geopolitical landscape and economic strategies
- A global divorce between China and the United States is inevitable.
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We are going through a global divorce between China and the United States.
— Brent Johnson
- The dollar is predicted to be the best of the worst fiat currencies moving forward.
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The dollar will be the best of the worst fiat.
— Brent Johnson
- Investors should favor the United States markets over international options due to lower risk.
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I continue to favor the United States and its markets over the rest of the world.
— Brent Johnson
- Owning gold is important as a hedge against debasement.
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Obviously having something that cannot be debased is important… I always recommend that people own gold.
— Brent Johnson
