How The United States Weaponizes The Dollar To Retain Global Hegemony

This is a viewpoint editorial by Luke Mikic, an author, podcast host and macro expert.

This is the very first part in a two-part series about the Dollar Milkshake Theory and the natural development of this to the “Bitcoin Milkshake.”


  • ” The dollar is dead!”
  • ” The Petrodollar system is breaking down!”
  • ” The Federal Reserve does not understand what it’s doing!”
  • ” China is playing the long video game; the U.S. is just preparing 4 years ahead.”

How lots of times have you heard claims like these from macroeconomists and sound cash supporters in current times? These kinds of remarks have actually ended up being so common, that it’s now a traditional viewpoint to state that we’re about to see the impending death of the U.S. dollar and subsequent fall of the terrific U.S. empire. Is contemporary America ready to suffer the very same fate as Rome, or does the nation still have a financial wild card concealed up its sleeve?

Similarly alarming forecasts were made about the U.S. dollar in the 1970 s throughout the
” Great Inflation,” after the desertion of the gold requirement in1971 It took the vibrant duo of Richard Nixon and Henry Kissinger to pull a bunny out of the hat to conserve the U.S. dollar. They successfully backed the USD with oil in 1973, birthing the petrodollar experiment.

It was an innovative relocation that extended the life of the dollar and the hegemonic reign of the U.S. as the world’s dominant superpower. The lesson we need to remove from this example in the 1970 s is to never ever undervalue an excellent empire. They’re an empire for a factor. Could the United States be required to play another financial wild card today to keep their power as the international hegemon in the face of de-dollarization?

History does not repeat, however it frequently rhythms.

Another resemblance to the 1970 s is emerging today as Federal Reserve Chair Jerome Powell is strongly raising rate of interest in an effort to combat the most ravaging inflation we’ve seen because that time. Is Powell merely battling inflation or is he likewise trying to conserve the trustworthiness of the U.S. dollar in the middle of a 21 st-century currency war?

I think we are on the precipice of the implosion of a worldwide adjoined, fiat-based monetary system. There are presently over 180 various currencies all around the world, and in these 2 posts I’ll detail how we will end the years with 2 currencies left standing. Another vibrant duo, if you will.

Most individuals presume these 2 currencies left standing will remain in violent opposition to each other, however I’m not so sure. I think they will form a cooperative relationship where they match each other, the exact same method a plump cherry compliments a milkshake on a warm, warm day.

But how do we arrive, and why do I think the U.S. dollar will be among the last dominos to fall? Basic gravity! Yes, the U.S. is running the biggest financial deficits of perpetuity. Yes, the U.S. has $170 trillion of unfunded liabilities Gravity is gravity, and there’s an approximated $300 trillion of financial gravity around the world making it most likely that the U.S. dollar will be the last fiat currency to hyperinflate. This is the greatest error individuals make when they evaluate the dollar. We frequently just take a look at the supply of dollars and a significantly growing Fed balance sheet.

However, everybody is forgetting the very first lesson of Economics 101: supply and need. There is a massive need for dollars all around the world.

This is a Bitcoin publication, so I will likewise be talking about the function that bitcoin might have in the cascading fiat currency collapse that I anticipate to unfold in the coming months and years.

If you accept the theoretical presumption that a person day the world will run on a bitcoin requirement, the majority of people will then presume this is bad for the United States, as it is the present international reserve status holder. The money making of bitcoin advantages one nation disproportionally more than any other: the United States.

  • A strong dollar will cause hyperdollarization.
  • A repercussion of hyperdollarization is increased bitcoin adoption.
  • An effect of increased bitcoin adoption is increased stablecoin adoption.
  • A repercussion of increased stablecoin adoption is increased U.S. dollar adoption!

This vibrant feedback loop will eventually end up being an intense, fiat currency great void.

Welcome to the “Bitcoin Milkshake Thesis,” the scrumptious macroeconomic dessert you have not become aware of.

Let me discuss a number of these complicated-sounding macroeconomic theories common today: petrodollars, eurodollars, dollar milkshakes, bitcoin milkshakes, Ray Dalio’s “Changing World Order.”

Most notably, I will describe how they all associate with the most tasty vibrant duo in the macroeconomic dessert location: the Dollar Milkshake fulfills the Bitcoin Milkshake.

The Dollar Milkshake Theory

By now, you’ve most likely at seen the impacts that the “ Dollar Milkshake Theory” had on monetary markets. The Dollar Milkshake Theory, developed and proposed by Brent Johnson in 2018, assists to discuss why every property class on the planet is cratering. From worldwide equities, blue chip tech stocks, realty and bonds, cash is draining of properties and the currencies of sovereign countries and into the worldwide safe house: the U.S. dollar.

If there is one chart that describes the Dollar Milkshake, this is it.

Distilled into its most basic format, the Dollar Milkshake Theory describes how the macroeconomic endgame will unfold for our financial obligation supercycle. It information in what order Johnson thinks the dominos will fall as we shift to a brand-new financial system.

The “milkshake” part of this tasty dessert includes trillions of dollars in liquidity that international reserve banks have actually printed over the previous years. Johnson articulates that the USD will be the straw that draws up all of that liquidity when capital looks for security in times of monetary danger. Capital streams to where it is dealt with finest. Johnson proposes that the U.S. dollar will be the last fiat currency standing, as sovereign countries are required to decrease the value of and hyperinflate their own nationwide currencies to source the U.S. dollars they require throughout a worldwide sovereign financial obligation crisis.

Put extremely merely, the Dollar Milkshake Theory is a symptom of the structural imbalances present in our financial system. These imbalances were anticipated and even anticipated by John Maynard Keynes at the Bretton Woods conference in 1944 and critiqued by Robert Triffin in the 1950 s and 1960 s. The repercussions of deserting the gold requirement without utilizing a neutral reserve property was ultimately going to return to haunt the worldwide economy.

With the dollar trashing ball presently ruining our monetary system and bankrupting federal governments all around the world, I believed it would be prompt to review what I stated over a year ago:

That quote stemmed from a post I released in a series entitled “ Bitcoin The Big Bang To End All Cycles” In the piece, I evaluated the history of 80- year, long-lasting financial obligation cycles and the history of run-away inflation to conclude that the inflation that had actually simply raised its head in 2021 was not going to be temporal, and rather would be a speeding up driver that would move us towards a brand-new financial system by the end of the years. Regardless of anticipating velocity, the velocity we’ve seen given that mid-2021 has still stunned me.

Here, I will take a more granular take a look at the intermediary actions associated with this worldwide sovereign financial obligation crisis, checking out the function bitcoin will play as this unfolds. That will provide us tips regarding which is most likely to be the next worldwide reserve currency after the loosening up of this financial obligation supercycle.

Many are puzzled by the U.S. dollar annihilating every other fiat currency on the world. How is this possible? There are 2 significant systems that have actually caused the structural imbalances present in our worldwide economy: the eurodollar market and the petrodollar system.

Much of the dollar-denominated financial obligation discussed above was produced by banks beyond the U.S. This is where the term “eurodollars” originates from. I’m not going to bore you with a description of the eurodollar market, rather simply provide you the fundamentals that relate to this thesis. The essential takeaway we require to comprehend is that the eurodollar market is reported to be in the 10s and even numerous trillions of dollars!

This suggests there is really more financial obligation outside the U.S. than there is within the nation. Great deals of nations either picked, or were required, to handle U.S. dollar-denominated financial obligation. For them to pay back that financial obligation, they require to gain access to dollars. In times of a financial downturn, lockdown of the worldwide economy or when exports are low, these other nations in some cases need to turn to printing their own currencies to gain access to U.S. dollars in the forex markets to pay their dollar-denominated financial obligations.

When the dollar index increases– showing that the U.S. dollar is getting more powerful versus other currencies– this puts a lot more pressure on these nations with big dollar-denominated financial obligations. This is precisely what we’re experiencing today as the dollar index (DXY) reached 20- year highs.

The one-month chart for the dollar index (DXY) returning to 1981 programs 20- year highs.

For a more comprehensive breakdown on the Dollar Milkshake Theory and the terrible results it’s having on markets today, I committed a blog site to discussing the thesis

This milkshake vibrant develops a massive need for U.S. dollars beyond the nation, which allows and in fact needs the Fed to produce massive quantities of liquidity in order to provide the world with the dollars the world requires to service its financial obligations. If the Fed desires the worldwide economy to work successfully, it merely needs to provide dollars to the world. This is a bottom line. In a worldwide interconnected world throughout peacetime, it makes good sense the Fed would provide the world with the required dollars.

Since we’ve been on the petrodollar system for the past 50 years, we’ve experienced lots of require the death of the dollar. The most threatening times our monetary system dealt with have actually emerged when there’s been a scarcity of U.S. dollars, and the DXY has actually reinforced relative to other currencies.

The Deadly Dollar Bull Runs

The dominant story in the macroeconomic environment over the previous years has actually surrounded the Fed and reserve banks with traditionally extraordinary loose financial policy. This appears to be altering in 2022.

As we view the Fed and reserve banks worldwide raise rate of interest in an effort to manage inflation, numerous are surprised and puzzled regarding what this brand-new paradigm of tightening up financial policy will imply for our deglobalizing international economy. It’s vital to bear in mind: All fiat currencies are losing acquiring power versus products and services.

All currencies are being quickly decreased the value of and will ultimately go back to their intrinsic worth of 0. Of the numerous currencies that have actually existed given that 1850, many have actually gone to 0. Presently, we’re in the procedure of seeing the last 150 approximately pattern to 0 in a worldwide competitive debasement to the bottom.

One of the significant measurements everybody utilizes to determine this relative strength is the dollar index. It is determined versus 6 significant currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

The DXY has actually had 3 significant bull runs because 1971 that have actually threatened the stability of the worldwide monetary system. Whenever the U.S. dollar has actually rallied, it’s ruined the balance sheets of emerging market nations that have actually taken on too much U.S. financial obligation with insufficient reserves.

In this dollar bull cycle, it’s not simply fringe emerging markets that are struggling with the skyrocketing U.S. dollar. Every currency is being annihilated versus the magnificent greenback. The Japanese yen has actually long been considered a safe house along with the U.S. dollar and for several years it’s been held up as the poster currency by Keynesian economic experts. They’ve had the pleasure of pointing towards Japan’s massive 266% debt-to-GDP ratio, together with the Bank of Japan’s huge 1,280- trillion-yen balance sheet with years of low inflation.

Japan held $1.3 trillion of U.S. Treasurys since January 2022, vanquishing China as the biggest foreign holder of U.S. financial obligation.

Both the Japanese and the Chinese have just recently turned to offering their U.S. Treasury holdings as they experience the international dollar scarcity.

A weak Japanese yen is normally bad for China due to the fact that Japanese exports end up being more appealing the weaker the yen gets. This is why whenever the yen has actually substantially damaged, the yuan has actually generally followed. There appears not to be an exception to this guideline in 2022, and very close attention must be paid to the other exporting Asian currencies, like the South Korean won and the Hong Kong dollar.

Then we have the Hong Kong dollar peg, which is likewise on the edge of a significant breakout, as it continues to knock on the 7.85 peg.

This peg has actually been held for over 30 years.

This peg has actually been held for over 30 years.

Shifting our attention to another energy-impoverished location, we can see that the USD is likewise revealing huge strength versus the euro, which is the second-largest currency worldwide. The EUR/USD has actually broken a 20- year assistance line and has actually just recently traded listed below parity with the dollar for the very first time in 20 years. The eurozone is suffering significantly from a vulnerable banking system and energy crisis with its currency losing 20% of its worth versus the dollar in the past 18 months alone.

The euro has actually lost 20% of its worth versus the dollar in simply 18 months.

The European Central Bank seems in crisis mode as they’ve hardly gotten rates of interest into the favorable world, while the Fed has actually moved its federal funds rate to nearly 4%.

The Fed has actually moved its federal funds rate to practically 4%.

This has actually triggered considerable capital flight out of Europe, and due to the current volatility in their bond market, ECB President Christine Lagarde was required to reveal a brand-new kind of quantitative easing (QE). This “anti-fragmentation” tool is a brand-new kind of QE where the ECB offers German bonds to purchase Italian bonds in an effort to keep the fracturing eurozone together.

This dollar bull run is damaging the world’s biggest and best currencies. The yen, euro and the yuan are the 3 biggest options to the U.S. dollar and all are rivals if the U.S. were to lose its reserve currency status. The emerging market currencies are where the genuine discomfort is being felt the a lot of. Nations like Turkey, Argentina and Sri Lanka are all experiencing 80%- plus inflation and function as excellent examples of how the dollar damaging ball injures the smaller sized nations one of the most.

What Comes Next?

The DXY has actually had a hell of a run over the past 12 months, so a pullback would not shock me. Both the DXY and the more equally-weighted broad dollar index are really extended after having parabolic increases in 2022 and are both now breaking down from their parabolas.

One-day chart of the DXY revealing a parabolic boost

One-day chart of the trade-weighted broad dollar index, likewise revealing a parabolic boost

Could we see a Fed balance sheet shoot to $50 trillion while at the same time seeing hyperdollarization as the eurodollar market is taken in?

It’s possible, however I believe the Fed is racing the clock. The petrodollar system is breaking down quickly as the BRICS countries are racing to establish their brand-new reserve currency.

It’s essential to see, this milkshake situation was constantly going to unfold. The structural imbalances in our monetary system would’ve constantly undoubtedly manifested themselves in this cause and effect of currency collapses that Brent Johnson articulated.

Interestingly, I think some current occasions have really accelerated this procedure. Yes, I see all the signposts that the dollar doomsayers are pointing out; the dollar will pass away ultimately, simply not. Let’s captivate the concept that the dollar is in reality passing away, and the USD will lose reserve currency status.

Who would take control of the worldwide reserve currency of the world?

For the financial factors I’ve pointed out above, I do not think the euro, the yen and even the Chinese yuan are feasible replacements for the U.S. dollar. In a current post entitled, “ The 2020 s Global Currency Wars,” I checked out the theses of Ray Dalio and Zoltan Pozsar and discussed why I thought both were neglecting the geopolitical, group and energy-related headwinds dealing with all the rivals to the U.S.

I do think that products are substantially underestimated which we will see a 2020 s “products supercycle,” due to years of underinvestment in the market. I likewise think protecting products and energy will play a crucial function in a country’s security, as the world continues to deglobalize. — disagreeing with Pozsar here– backing cash with products isn’t the service to the issue the world is dealing with.

I think the U.S. dollar will be the last fiat currency to hyperinflate, and I in fact anticipate it to hang on to the reserve currency status up until this long-lasting financial obligation cycle concludes. To go one action even more, I really believe there’s a strong possibility that the United States will be the last nation ever to hold the title of “international reserve currency provider” if they play their cards.

We will check out the Bitcoin Milkshake Theory in part 2.

This is a visitor post by Luke Mikic. Viewpoints revealed are totally their own and do not always show those of BTC Inc or Bitcoin Magazine.

Source: BitcoinMagazine

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