The Milkshake the United States Drinks Through Everyone Else's Straw

In late 2018, a relatively obscure American fund manager named Brent Johnson published a video on YouTube that introduced what he called the Dollar Milkshake Theory. The thesis, framed in the casual register of an internet financial commentator, argued that the U.S. dollar would experience a sustained and possibly violent multi-year appreciation against most other global currencies, not because of strength in the American economy but because of weakness elsewhere — specifically, the cascading need of foreign banks, sovereigns, and corporations to access dollar liquidity in an environment where global dollar supply was structurally limited.

The metaphor was deliberately undignified. The world was holding a milkshake. The straw was held by the United States. When the global economy needed dollars urgently, the United States would suck the liquidity through the straw, leaving everyone else with an empty glass and a foreign-currency obligation they could not service.

For approximately five years after Johnson published the video, the broad strokes of his thesis tracked observable reality with unusual precision. The dollar index appreciated by approximately fifteen to twenty percent against a basket of trading-partner currencies. Emerging-market central banks scrambled for dollar swap lines. Sovereign debt issued in dollars by emerging-market governments — the so-called Eurodollar market in its broadest sense — became materially more expensive to service. Several smaller economies, including Sri Lanka, Ghana, and Lebanon, entered formal default. Larger ones, including Turkey and Argentina, entered slow-motion currency crises. The thesis, framed casually in 2018, had become by 2024 a piece of conventional analytical framework.

The Mechanism. The structural fact the Milkshake Theory rests on is the dollar's status as the world's reserve currency, combined with the fact that the supply of dollars outside the United States — held by foreign banks, foreign central banks, foreign corporations — is not directly controlled by the United States Federal Reserve. The Federal Reserve sets dollar interest rates. The interest rate environment affects the cost of holding dollars. When the rate rises, the cost rises, and the marginal foreign holder of dollar-denominated assets faces a choice: continue holding the asset at a higher carrying cost, or sell the asset to access the dollar liquidity directly. The aggregate of those decisions, summed across the global economy, determines the rate at which the dollar appreciates against other currencies.

The thesis depends on a second observation: that the foreign-currency holders are, in aggregate, more dependent on dollar liquidity than the United States is dependent on access to their currencies. This is generally true. American international transactions are largely denominated in dollars; American banks operate within a Federal Reserve discount window; American corporations are not, in normal conditions, exposed to currency-translation risk on their dollar-denominated cash flows. The asymmetry is durable.

The Limits. The Milkshake Theory is not, however, infinite. It depends on a particular global financial architecture that itself can be challenged. The BRICS group of nations has, for several years, been actively exploring alternative settlement mechanisms — bilateral currency swap arrangements, central bank digital currencies that bypass the SWIFT messaging system, gold-settled trade between energy exporters. China has pursued substantial bilateral trade in renminbi with Russia, Iran, and Saudi Arabia. The dollar share of global FX reserves has declined gradually but consistently for two decades — from approximately seventy percent in 2000 to around fifty-eight percent in 2024, according to International Monetary Fund data.

These are slow shifts. The thesis does not require the dollar to remain the reserve currency forever, only for the transition to remain incremental over the relevant investment horizon. So long as the dollar remains the dominant settlement currency for energy, the dominant funding currency for emerging-market sovereign debt, and the dominant unit of denomination for international trade invoicing, the Milkshake Theory remains operative. The structural pressures Johnson identified will continue to push foreign currencies down against the dollar in each successive global liquidity crisis.

The Investment Implications. What an investor takes from the Milkshake Theory, beyond the directional currency view, is a particular framework for thinking about portfolio construction during periods of global stress. American assets, denominated in the strengthening currency, tend to outperform foreign assets on currency-translation grounds even when the underlying fundamentals are unchanged. Foreign equities are particularly vulnerable. Emerging-market sovereign debt, even when nominally hedged, carries hidden currency exposure through the issuer's underlying economic condition. The portfolio with substantial dollar-denominated assets, in this framework, has a structural tailwind during periods of liquidity stress that compounds with the underlying asset returns.

Johnson, the fund manager, has continued publishing periodic updates to the thesis. The dollar has continued, mostly, to behave consistently with his framework. The straw, as he put it in 2018, has not yet broken. Whether it will eventually break, and what financial architecture will replace it when it does, is the open question that several decades of analytical work will eventually have to answer.