The Dollar Milkshake Theory Explained

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Tidy six minute presentation on the Dollar Milkshake Theory.

For those not familiar with the term - its the idea that the US dollar, being current world reserve currency and belonging to only one country, could see a situation where the USD strengthens so much that it sends most countries in the world into debt default which then in turn hits the US.

I tried to look at this "milkshake" theory and so far, I think its main symptom is that inflation in the US is lower than elsewhere.
Which does not look like a catastrophe to me. Rather, some point to consider for financial investors and central banks.

The main hole I see it this theory is that it considers USD the only route of escape for investors. It's not true. Where I live, people who have money buy things to escape inflation. Physical things that can potentially help survive harder times.
Also, locally, Euro and Swiss Franks are commonly used for "strong" currencies, further reducing the impact on USD.

All this does not mean another debt bubble wouldn't burst at some point - as it has several times already.

I would hope that there are enough alternate pathways for private investors and consumers to stem the tide, I got the impression though that the theory's mostly handling the behavior of central governments and their propensity to print money to buy US treasuries, that universal 'print money to buy bonds' behavior would ratchet up the dollar, force countries who were servicing USD debt to also do similar things, which means it would hit the consumer via the financing behaviors of their own central governments.

It sounds like they're unpacking something like a 'critical vulnerability' that comes with the world reserve currency being just one nation's currency rather than something like a weighted-average basket of currencies. Hopefully the idea being out there helps people see symptoms of trouble and behave wisely in light of it.

I generally believe that the debt-founded capitalist economy full of empty money lacks robustness, which makes it grow fast but collapse easily in next and next "panics" and "crises".

So...if the dollar gets so insanely "strong" then - it just means Americans wont be able to sell anything abroad- because it will make American products insanely expensive abroad.

And this inability to sell stuff abroad will hurt America's economy...which will...make the dollar weak.

So...whats the problem?

If I understand it correctly, physical goods are a small portion of the financial market.
The biggest problem would be debt in dollars - local and foreign. And that's common.

Normally, there is a correlation between a "strong dollar" and economic distress for the United States.

The current ask purchase price per ounce for one gold Krugerrand is: $1,843.40.
The Krugerrand is a South African gold coin with a portrait of President Kruger on the obverse.
Value: 1 troy oz. fine gold

I just read a (non fiction) book where someone had 40K USD in gold Krugerrands in his sock drawer for emergencies.

A Civil Action by Jonathan Harr

https://www.fidelity.com/learning-cente ... ong-dollar

"Is a strong dollar bad?
The most obvious risk a strong dollar poses is the way it can hurt the US stocks that many people rely on as mainstays of their retirement accounts. The US-based companies that make up the S&P 500 earn nearly 40% of their revenues outside the US. As Fidelity Director of Global Macro Jurrien Timmer explains, "When the dollar rises against, say, the euro, as it has done in the last year, then a company's euro-denominated sales are worth less once they're exchanged into dollars." That means a rising dollar is likely to have a noticeable impact on these companies' revenues, earnings, and stock prices.

Besides hurting earnings, a super-strong dollar can also hurt prices of US stocks and bonds by making them more expensive for big non-US institutional investors. Faced with higher prices, they may opt to invest their money elsewhere, dragging US markets downward in the process.

Or is a strong dollar good?
While a strong dollar may hurt US stocks, it also makes international stocks a bargain for US investors who want to diversify their portfolios. Historically, international stocks have outperformed US stocks and they also have tended not to rise or fall in lockstep with US markets. Over time, diversifying with non-US stocks may reduce risk in an investor's portfolio. The strong dollar may also help the stocks of non-US companies who operate in currencies such as the yen or euro but who export their products to the US.

However, Fidelity Director of Quantitative Market Strategy Denise Chisholm warns against making major changes to your investments based on fluctuations in foreign exchange rates. "The strength of the dollar hasn't historically been much of a predictor of how stock sectors will perform. If you bought or sold sectors based on the typical historical outcomes when the dollar has appreciated by 10% or more in a year, which is the situation we're in, you'd have made the wrong move for 7 of the 11 sectors," she says.

A strong dollar makes imported goods cheaper for US consumers. That may help cushion some of the impact of high inflation in the US, but much of the food and energy whose price increases are hitting households the hardest are produced in the US rather than imported, and continuing supply chain tangles are still likely to influence the prices of foreign-made goods at least as much currency values are.

Cheaper imports also create other problems for the US by increasing the country's trade deficit. The US already imports nearly $1 trillion more in goods and services than it exports each year, almost 5% of the country's gross domestic product (GDP), at a time when total US debt is already well over 100% of GDP. Fidelity's Asset Allocation Research Team says that high levels of public and private debt are likely to mean returns from stock and bond investments may be lower in the decades ahead than they have been historically."

So the US buys more stuff from abroad than it sells already.

Which should make the dollar weaker.

But the dollar just keeps on sliding UP hill...so to speak.

It's a positive feedback loop scenario. It's not guaranteed but it sounds like they've found some parameters where they're concerned that contagion is a realistic enough risk that it needs to be out there in the public imagination with a name that makes it at least available to be 'household' vocabulary (at least among investors and market watchers).

The US government recieved criticism for printing too much money and bailing out loads of banks & industries. So how is the dollar strong now?

First - depends whose criticism. What's clarified is if we're the world reserve currency we had much more headroom for QE than any other country precisely because getting dollars isn't just us and our foreign debtors, it's us, debtors, and anyone who wants to transact trade around the world conveniently. That third group I think, and the sheer number of foreign debtors, is what makes the difference. Even shorter version - higher structural demand for the dollar (globally) than of any other currency based on the system Bretton Woods set up.

I just think eventually the U.S. dollar will be worth 0 but I think we will prolly have another world reserve currency by then.The Petrodollar system is going away at some point.I think we will have another world reserve currency before I am gone.

Would it make sense for that currency to be a weighted-averaged basket of maybe ten or twenty other currencies? Admittedly I'm throwing that out there naively and I don't know what the side-effects would be off the top of my head but it seems like having a currency that belongs to the commons and belongs to no individual nation could help.

I really dont know if that could work.But Ideally I would prefer a dollar backed by gold but I dont think that will ever happen.