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#196 Brent Johnson, Creator of The Dollar Milkshake Theory, Explains How The Global Economy Is 'One Big Carry Trade'
The Julia La Roche Show
Exploring the Dollar Milkshake Theory and Global Economic Dynamics
The Dollar Milkshake Theory presents a framework for understanding the dynamics of global liquidity and economic performance during crises. As the world faces economic downturns, all nations possess the capability to generate liquidity through their respective monetary policies, akin to the universal access to a printing press. However, the United States, as the issuer of the world’s reserve currency, has a decisive advantage, likened to having a 'straw' that allows it to absorb this global liquidity. This process results in U.S. markets outpacing those of other countries. Liquidity is crucial for economic vitality, and if the U.S. acquires more liquidity, it inevitably withdraws from other markets, exacerbating their economic struggles. Consequently, a cycle ensues where the strength of the dollar leads to international crises, prompting a flight towards safe-haven assets like the dollar and gold, thus reinforcing the dollar's strength further. Critics may point to periods of dollar weakness as evidence against the theory; however, such fluctuations do not negate its validity. Even during phases when the dollar may weaken, it often reflects a temporary situation that ultimately leads to other economies facing deflationary pressures and necessitating their own quantitative easing. This illustrates that the existence of ample dollar liquidity in the system indicates stability, whereas a lack of it signifies a crisis, encapsulating the essence of the theory's assertion on economic interdependence and the cyclical nature of currency dynamics.
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Speaker 2
We last had you on an episode 79 obviously we've we've got a lot more viewers to this channel I know a lot of folks are going to be familiar with the dollar milkshake theory Which is a framework you developed to explain how a sovereign debt and currency crisis might play out. You have a great analogy too for it from the movie There Will Be Blood. I know you're probably so annoyed being asked the question, but would you line just for the folks who aren't up to speed or aware? Could you just frame it up and explain the theory to them and the framework? Sure.
Speaker 1
So the theory is this, is that if the world gets in some kind of a crisis or in some kind of a slow growth story or in some kind of a, you know, downturn economically, the whole world has the same technology of a printing press. So, you know, when you see these, you know, money printer go burr means it's not just the Fed that does it, the whole world does it. ECB does it, China does it, Japan does it, Australia does it. And so the whole world will print or generate this liquidity mix, right? They will shoot this liquidity out into the global economy. But for many reasons, some of them deserve and some of them not deserve the fact that the United States is the global hegemon and has the global reserve currency, they have a number of advantages that the rest of the world just does not have. And as a result, the US is the one that has the straw. So all this liquidity gets mixed, but the US has the straw, and the US sucks up that liquidity into the US markets. When they do that, that leads to US markets outperforming the rest of the world. And if you think about it, liquidity is the lifeblood of an economy. You always want liquidity. The lack of liquidity is bad. So if the US gets the liquidity, that means it's coming from somewhere. And if it's leaving someplace else, the place that it's leaving is now going to suffer or is going to struggle more than the place that has the liquidity. And so the point has been is it becomes kind of a self-reinforcing cycle. Dollar strength begets more dollar strength because as the dollar gets stronger, the rest of the world goes into crisis. As they go into crisis, people seek out a safe haven. As they seek out a safe haven, the dollar and gold is the two places they go that causes even more. And so you can see how this becomes a vicious cycle. Now, some people have said to me, well, the dollar has fallen over the last couple of years. Doesn't that prove the theory wrong? Well, I suppose you could say it proves the theory wrong and that we haven't had the crisis yet. And I'm the first to say I thought we would have already had a sovereign debt crisis and we have not. But the point I'd like to make is that you can have periods of dollar weakness. If the if the US is running a weaker monetary policy than its peers for a short period of time, or if the US starts QE before the rest of the world, you could have a period of a couple months or a couple years where the dollar falls versus its competitors. But if that happens, then those other economies, as their currencies rise, they will start to struggle with deflationary pressures and they will eventually have to do QE as well. And so all this, all dollar weakness does is kick the can down the road. And remember, if we have plenty of dollars in the system and dollar liquidity is plentiful, that is not a crisis.
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