What is the dollar milkshake theory?

The dollar milkshake theory, popularized by Santiago Capital's Brent Johnson, posits that the US dollar will strengthen dramatically as the global financial system's structural dependence on dollars combines with deteriorating conditions in other economies. The metaphor describes the US as a "milkshake" of relatively attractive assets and yields that "sucks" capital out of the rest of the world through the "straw" of the global dollar-denominated financial system.

The theory rests on several structural observations. Approximately $12-13 trillion in dollar-denominated debt exists outside the United States, creating constant demand for dollars to service that debt. Global trade is predominantly invoiced in dollars, requiring dollar funding for international commerce. US Treasury markets are the deepest and most liquid in the world, serving as the global safe haven during crises. And US economic growth, particularly driven by technology, has outpaced most developed-world peers.

Under the milkshake theory, as global economies weaken or face financial stress, the demand for dollar liquidity intensifies. Foreign entities scramble to acquire dollars to service their dollar debts, repatriate capital to the safety of US markets, and hedge currency exposure. This demand surge strengthens the dollar further, which in turn makes it harder for foreign borrowers to service their dollar debts (because their local currencies are weakening), creating a self-reinforcing feedback loop.

Critics argue that the theory underestimates the Fed's willingness to weaken the dollar through rate cuts and liquidity provision, the potential for coordinated international intervention (as in the 1985 Plaza Accord), and the slow but meaningful diversification of reserves away from the dollar. The theory also implies that dollar strength would eventually become self-defeating as it crushes US corporate earnings abroad and widens the trade deficit. Nevertheless, the milkshake framework provides a useful lens for understanding why the dollar has remained persistently strong despite US fiscal deficits and why dollar funding stress appears during global crises.