For already many years, the United States and the USD dominate the financial world. The dollar is stronger than ever and this makes many investors wonder. Will the Dollar Milkshake Theory become a reality? It is devised by Santiago Capital CEO Brent Johnson who foresees the downfall of the U.S. as a leading financial world power, resulting the dollar to 'explode'. With many countries depending on the dollar, what would that mean for economies and investors worldwide? A deep dive into the facts and predictions.
The explanation of the Dollar Milkshake Theory
The name of this theory comes from a scene of the film There Will Be Blood (2007) by Paul Thomas. In this scene character Daniel Plainview takes revenge on Eli. Daniel wants to buy land from Eli to drill for oil, but Eli only wants to lease out the land. Tensions run higher and higher, where Daniel eventually threatens Eli, telling him he will just put a straw in the land and suck the out the oil himself with the quote "I will drink your milkshake!". In the Theory Daniel is the USA, putting its straw into the economies of others to suck out the dollars for its personal gain with no regard for the economies it leaves in ruins.
Back to the theories inventor who connects the film with reality: Johnson. As the head of a large asset management firm, with the asset responsibility for billions of dollars, and his role as general partner of the IceCap Strong Dollar Fund, Johnson keeps a close eye on the dollars behavior. In his theory Johnson foresees a rapid rising value of the U.S. Dollar, supercharged by the FEDs policies of late years. The concern is that if the level of the dollar moves up, particularly if it rises too fast, it could destabilize financial markets tremendously.
"Many believe that the U.S. is printing too many dollars and that the value of the dollar will therefor decline," says Rowan Rozemond, Head of Global Investor Relations and Board member at DHF Capital S.A. "This theory however emphasizes on the fact that other countries are also printing their own currencies in similar amounts. Therefore, counterintuitive pushing the Dollar higher because if we all create currency, the Dollar will not become a bigger part of the total basket of currencies in the world." The global financial system is built on the US dollar and even if they don't want to, many countries still need dollars to buy oil, do business and pay of large sovereign debt. And to combat the shocks in liquidity during the last two years, the world outside the U.S. has printed even more than the U.S.
"The U.S. benefits from this system as they own the settlement system and process all dollars. Because even when their economy is not doing so well, it can just suck Dollars to its shores to fill the holes in its liquidity," Rozemond explains. "This constant need for dollars creates pressure for the price of dollars to go up, which can lead to sovereign debt crisis's, credit contraction, and rapid tightening of the dollar supply within these foreign countries. But thanks to extra printed capital in the past years, the liquidity never stopped flowing and the economy flourished."
Most national debt globally is in USD, there where the U.S. also have a somewhat a 31 trillion dollar national debt itself. On January 19, 2023 the National Debt Ceiling of the U.S. has been reached resulting in borrowing money put to hold. And, as many mistaken, the U.S. government cannot print money, only the central bank can do so. And so in order to get more liquidity the U.S. government has to issue bonds for the central bank to buy with printed money. In other words, the U.S. entered a debt crisis in which its unable to issue new debt for the central bank to buy and it has not enough income to pay its creditors. This, in conjunction with higher rates, meant that the amount of Dollars was no longer expanding. Easing the U.S. economy and lowering the demand for Dollars. Therefor lowering the pressure on the dollar easing its price relevant to other currencies.
"Now the USD short positioning is getting closer and closer to stretched levels. We usually see this when the U.S. are reaching their debt ceiling." Rozemond shows the dollar declining figures. "It's likely that the US government will push the can down the road, making it once again possible for the U.S. government to expand its debt issuance. And with a weak economy the only buyer of last resort is going to be again the central bank. Therefor we believe that after the debt ceiling is moved once more, we will see a strong move up in the dollar once again. The U.S. will continue to suck dollars out of the world economy into its borders until it loses its position as the world reserve currency, which the economy is now still far away from."
Current developments of the U.S. Dollar and the web of worldwide debt
Like we said earlier, most world debt is denominated in U.S. dollars, the world's reserve currency that still dominates international trade. After all, the U.S. economy is, even when its weakening, still relatively strong in comparison to other economies. A shortage of dollars therefor is created in the blink of an eye. We will notice that in the FED's policy. When it raises its interest rates it will then cause or intensify a global recession or depression. And that causes deflation. A worldwide deflation then leads to more demand for dollars and therefore a much stronger dollar index (DXY). Shortage, after all, makes strengthens a currency. The dollar, as it were, sucks in global liquidity through a straw like a maelstrom. A financial black hole to which nothing escapes.
A strong dollar and deflation are extremely problematic as, among other things, US government bonds will be dumped for dollars, which will increase government bond yields. This will eventually make the interest on the huge US national debt unaffordable. The countries with a weak currency, economy and unpayable dollar debt will go bankrupt. The dollar will eventually continue to appreciate against other currencies until the global financial system and with it the US bond market breaks down. The dollar index will continue to go up and eventually explode itself like we've seen with the Pound at the end of the British empire as well as the crash of the Dutch guilder during the Amsterdam banking crisis of 1763 which marked the end of Dutch world rule.
DHF Capital S.A. knows which way to go
Although the Dollar Milkshake Theory may sound like a doomsday thought, it can also work in your own advantage. To make it do so, you need an infield expert with the experience to battle the right way.
Rozemond tries to comfort: "With DHF Capital S.A. being a dollar denominated fund in Europe with assets in currencies and U.S. equities, we are in a unique position to hedge against the Dollar Milkshake Theory." Hedging means that you limit the risk of financial asset by the use of financial tools and strategies. Making trades elsewhere protects the risk."
"Hedging is our solution. Our strategy consists largely of currency trading. As a result, your investment is not only in the strongest coin, but we hedge it as as well," Rozemond explains. "We always keep a close eye on these developments and we adjust where necessary. We actively position our total managed assets on such a way that we ever benefit the right currencies, whenever the time."
With the current situation in the U.S., it can be a wave of comfort to have an expert at your side. Reach out to us and gladly we explain how we can help you minimize any risks and maximize the profits.