TL;DR
The dollar milkshake theory states that the dollar will gain strength in the short to medium term. The inventor of the term, Brent Johnson, believes that the current fiat money system will inevitably fail, but that the dollar will gain strength until that time, and will collapse last. At that point, hard assets like gold (and Bitcoin?) could rise sharply. But until that time, the dollar isn’t going away, despite what you might hear about de-dollarization.
Let’s start with a meme that Johnson also invokes. In the 80s cult classic Highlander, an ancient clan of immortal warriors battling to the death. Only beheading will kill an immortal for good. Kurgan is the villain under these immortals, while MacLeod (the lead is played by Christopher Lambert) is the hero.
(Before the extravagant name of the theory and the memes in this piece throw you off, let’s first establish that Brent Johnson runs a hedge fund and has over twenty years of experience in the capital markets.)
The Highlander meme, where MacLeod is the last man standing, often pops up in crypto and in currency discussions in general. Why? Here’s the parallel. All immortals share the belief that “In the end, there can be only one” and the prize is the power of all the immortals through time. This rings true to the world of currency, where a dominant currency tends to dominate and suck out the energy from the others.
Just see what’s happening now to weaker currencies like the Argentine peso and the Turkish Lira. The dollar sucks them dry. According to Brent Johnson, in the coming years the dollar will do this to all currencies. Just like the villain warrior Kurgan, the dollar will first kill all other currencies. Only then the final showdown will happen, between gold and the dollar. Gold will win. Johnson is not a Bitcoiner, but as crypto enthusiasts, we can insert Bitcoin in the place of gold in this narrative. It shares many of the same properties.
Signs of De-Dollarization: Not So Fast
But why would the dollar suck up money from the worldwide capital market? Isn’t that idea absolute? Aren’t we in a trend of de-dollarization? Let’s first have a look at a theme that has been popping up a lot in recent months: the trend of de-dollarization. Are countries saying goodbye to the dollar?
It is true that some shifts are happening. Talks between India and China about abandoning the dollar for their trade are advanced and BRICS countries are developing a joint currency.
Some concrete examples of de-dollarization:
- Brazil has agreed with China to settle their mutual trade in their own currencies.
- Kenya will settle the purchase of oil from Saudi Arabia in its own shilling.
- Russia will use the Chinese yuan for trade with Asia, Africa, and Latin America.
- France purchased gas from China with the yuan instead of the dollar for the first time.
This is leading to alarmist messages about the dollar. But is the dollar’s hegemony ‘crumbling’, as some would have it?
Not so fast. Sure, various countries would like to see a different balance. But just take a look at the IMF, which monitors the composition of international reserves. These consist mainly of dollars. The share is declining, but not dramatically.
We also see this sluggishness in other data. Many debts are still denominated in…
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
