How The United States Weaponizes The Dollar To Retain Global Hegemony

This is an opinion editorial by Luke Mikic, a writer, podcast host and macro analyst.This is the first part in a two-part series about the Dollar Milkshake Theory and the natural development of this to the “Bitcoin Milkshake.”Introduction”The dollar is dead!””The Petrodollar system is breaking down!””The Federal Reserve does not understand what its doing!””China is playing the long game; the U.S. is only planning four years ahead.”How many times have you heard claims like these from macroeconomists and sound money supporters in current times? These types of remarks have actually become so common, that its now a mainstream opinion to state that were about to see the impending death of the U.S. dollar and subsequent fall of the great U.S. empire. Is contemporary America ready to suffer the same fate as Rome, or does the country still have a financial wild card hidden up its sleeve?Similarly dire forecasts were made about the U.S. dollar in the 1970s during the “Great Inflation,” after the abandonment of the gold requirement in 1971. It took the vibrant duo of Richard Nixon and Henry Kissinger to pull a rabbit out of the hat to save the U.S. dollar. They efficiently backed the USD with oil in 1973, birthing the petrodollar experiment.(Source)It was an ingenious relocation that prolonged the life of the dollar and the hegemonic reign of the U.S. as the worlds dominant superpower. The lesson we need to take away from this example in the 1970s is to never undervalue a great empire. Theyre an empire for a factor. Could the United States be forced to play another monetary wild card today to retain their power as the global hegemon in the face of de-dollarization? History does not repeat, but it typically rhythms. Another similarity to the 1970s is emerging today as Federal Reserve Chair Jerome Powell is strongly raising rate of interest in an attempt to combat the most ravaging inflation weve seen since that time. Is Powell just combating inflation or is he also trying to conserve the trustworthiness of the U.S. dollar in the middle of a 21st-century currency war?I believe we are on the precipice of the implosion of a globally adjoined, fiat-based financial system. There are presently over 180 different currencies all around the world, and in these two short articles Ill detail how we will end the decade with two currencies left standing. Another vibrant duo, if you will. (Source)Most individuals presume these two currencies left standing will remain in violent opposition to each other, however Im not so sure. I think they will form a cooperative relationship where they match each other, the exact same way a plump cherry compliments a milkshake on a warm, bright day.But how do we get there, and why do I believe the U.S. dollar will be one of the last dominos to fall? Simple gravity! Yes, the U.S. is running the largest financial deficits of all time. Yes, the U.S. has $170 trillion of unfunded liabilities. Gravity is gravity, and theres an approximated $300 trillion of financial gravity around the world making it most likely that the U.S. dollar will be the last fiat currency to hyperinflate. This is the most significant mistake people make when they analyze the dollar. We frequently only look at the supply of dollars and a significantly growing Fed balance sheet. (Source)However, everyone is forgetting the very first lesson of Economics 101: supply and need. There is a huge demand for dollars all around the world.This is a Bitcoin publication, so I will likewise be talking about the role that bitcoin might have in the cascading fiat currency collapse that I anticipate to unfold in the coming months and years.If you accept the theoretical presumption that one day the world will run on a bitcoin standard, the majority of people will then assume this is bad for the United States, as it is the present worldwide reserve status holder. The money making of bitcoin advantages one nation disproportionally more than any other: the United States. A strong dollar will cause hyperdollarization.A repercussion of hyperdollarization is increased bitcoin adoption.An effect of increased bitcoin adoption is increased stablecoin adoption.A consequence of increased stablecoin adoption is increased U.S. dollar adoption!This dynamic feedback loop will eventually become an all-consuming, fiat currency great void. Welcome to the “Bitcoin Milkshake Thesis,” the delicious macroeconomic dessert you havent heard of. (Source)Let me discuss a number of these complicated-sounding macroeconomic theories common today: petrodollars, eurodollars, dollar milkshakes, bitcoin milkshakes, Ray Dalios “Changing World Order.” Most notably, I will discuss how they all relate to the most scrumptious dynamic duo in the macroeconomic dessert place: the Dollar Milkshake satisfies the Bitcoin Milkshake.The Dollar Milkshake TheoryBy now, youve probably at seen the results that the “Dollar Milkshake Theory” had on financial markets. The Dollar Milkshake Theory, produced and proposed by Brent Johnson in 2018, helps to explain why every possession class worldwide is cratering. From worldwide equities, blue chip tech stocks, property and bonds, money is draining of possessions and the currencies of sovereign nations and into the worldwide safe haven: the U.S. dollar. If there is one chart that discusses the Dollar Milkshake, this is it.(Source)Distilled into its easiest format, the Dollar Milkshake Theory explains how the macroeconomic endgame will unfold for our debt supercycle. It details in what order Johnson thinks the dominos will fall as we transition to a new monetary system. The “milkshake” part of this delicious dessert consists of trillions of dollars in liquidity that worldwide reserve banks have printed over the previous years. Johnson articulates that the USD will be the straw that draws up all of that liquidity when capital looks for security in times of monetary danger. Capital streams to where it is treated best. Johnson proposes that the U.S. dollar will be the last fiat currency standing, as sovereign countries are required to devalue and hyperinflate their own national currencies to source the U.S. dollars they need during a global sovereign debt crisis.Put very merely, the Dollar Milkshake Theory is a manifestation of the structural imbalances present in our monetary system. These imbalances were expected and even predicted by John Maynard Keynes at the Bretton Woods conference in 1944 and critiqued by Robert Triffin in the 1950s and 1960s. The repercussions of deserting the gold standard without using a neutral reserve possession was eventually going to return to haunt the worldwide economy.With the dollar damaging ball currently ruining our financial system and bankrupting federal governments all around the world, I thought it would be timely to revisit what I stated over a year ago:(Source)That quote originated from a short article I released in a series titled “Bitcoin The Big Bang To End All Cycles.” In the piece, I analyzed the history of 80-year, long-lasting financial obligation cycles and the history of devaluation to conclude that the inflation that had actually simply reared its head in 2021 was not going to be temporal, and rather would be an accelerating driver that would move us towards a brand-new monetary system by the end of the decade. Regardless of anticipating velocity, the velocity weve seen because mid-2021 has still stunned me. Here, I will take a more granular appearance at the intermediary actions included in this worldwide sovereign financial obligation crisis, exploring the role bitcoin will play as this unfolds. That will offer us tips as to which is most likely to be the next global reserve currency after the relaxing of this debt supercycle. Numerous are puzzled by the U.S. dollar annihilating every other fiat currency on the globe. How is this possible? There are two major systems that have actually caused the structural imbalances present in our international economy: the eurodollar market and the petrodollar system.Much of the dollar-denominated debt mentioned above was developed by banks beyond the U.S. This is where the term “eurodollars” originates from. Im not going to bore you with a description of the eurodollar market, rather just provide you the fundamentals that are relevant to this thesis. The essential takeaway we need to understand is that the eurodollar market is reported to be in the tens and even hundreds of trillions of dollars!This suggests there is actually more debt outside the U.S. than there is within the country. Great deals of nations either picked, or were required, to take on U.S. dollar-denominated financial obligation. For them to repay that financial obligation, they need to gain access to dollars. In times of an economic slowdown, lockdown of the international economy or when exports are low, these other countries often have to turn to printing their own currencies to gain access to U.S. dollars in the forex markets to pay their dollar-denominated debts.When the dollar index increases– indicating that the U.S. dollar is getting stronger versus other currencies– this puts a lot more pressure on these nations with big dollar-denominated financial obligations. This is exactly what were experiencing today as the dollar index (DXY) reached 20-year highs.The one-month chart for the dollar index (DXY) going back to 1981 programs 20-year highs.For a more comprehensive breakdown on the Dollar Milkshake Theory and the destructive results its having on markets today, I devoted a blog site to explaining the thesis.This milkshake vibrant creates an enormous need for U.S. dollars outside of the nation, which allows and really requires the Fed to produce huge amounts of liquidity in order to supply the world with the dollars the world needs to service its financial obligations. If the Fed wants the worldwide economy to function successfully, it merely should provide dollars to the world. This is a crucial point. In a globally interconnected world throughout peacetime, it makes sense the Fed would supply the world with the needed dollars.Since weve been on the petrodollar system for the previous 50 years, weve experienced many require the death of the dollar. However, the most threatening times our financial system dealt with have actually emerged when theres been a shortage of U.S. dollars, and the DXY has reinforced relative to other currencies. The Deadly Dollar Bull RunsThe dominant story in the macroeconomic environment over the past decade has actually surrounded the Fed and reserve banks with traditionally extraordinary loose financial policy. However, this appears to be altering in 2022. As we watch the Fed and reserve banks worldwide raise rates of interest in an attempt to control inflation, many are shocked and confused as to what this new paradigm of tightening financial policy will suggest for our deglobalizing worldwide economy. Its paramount to bear in mind: All fiat currencies are losing buying power versus goods and services.All currencies are being rapidly cheapened and will ultimately return to their intrinsic value of 0. Of the hundreds of currencies that have existed because 1850, a lot of have actually gone to 0. Currently, were in the procedure of experiencing the final 150 or so trend to 0 in a worldwide competitive debasement to the bottom.(Source)One of the significant measurements everybody utilizes to measure this relative strength is the dollar index. It is measured against six significant currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.(Source)The DXY has actually had 3 major bull runs since 1971 that have actually threatened the stability of the worldwide monetary system. Each time the U.S. dollar has actually rallied, its destroyed the balance sheets of emerging market countries that have taken on too much U.S. debt with too little reserves. (Source)In this dollar bull cycle, its not simply fringe emerging markets that are experiencing the soaring U.S. dollar. Every single currency is being annihilated against the mighty greenback. The Japanese yen has long been considered as a safe house together with the U.S. dollar and for many years its been held up as the poster currency by Keynesian financial experts. Theyve had the happiness of pointing toward Japans massive 266% debt-to-GDP ratio, together with the Bank of Japans massive 1,280-trillion-yen balance sheet with years of low inflation.(Source)Japan held $1.3 trillion of U.S. Treasurys as of January 2022, beating out China as the biggest foreign holder of U.S. financial obligation. (Source)Both the Japanese and the Chinese have actually recently resorted to selling their U.S. Treasury holdings as they suffer from the global dollar scarcity. A weak Japanese yen is generally bad for China since Japanese exports become more attractive the weaker the yen gets. This is why every time the yen has actually significantly compromised, the yuan has actually normally followed. There appears not to be an exception to this guideline in 2022, and very close attention must be paid to the other exporting Asian currencies, like the South Korean won and the Hong Kong dollar.Then we have the Hong Kong dollar peg, which is also on the edge of a major breakout, as it continues to knock on the 7.85 peg. This peg has actually been held for over 30 years.This peg has been held for over 30 years.Shifting our attention to another energy-impoverished area, we can see that the USD is likewise revealing massive strength against the euro, which is the second-largest currency in the world. The EUR/USD has broken a 20-year assistance line and has actually recently traded listed below parity with the dollar for the first time in 20 years. The eurozone is suffering tremendously from a fragile banking system and energy crisis with its currency losing 20% of its value versus the dollar in the previous 18 months alone. The euro has actually lost 20% of its worth against the dollar in just 18 months.The European Central Bank seems in crisis mode as theyve barely gotten rate of interest into the favorable world, while the Fed has actually moved its federal funds rate to nearly 4%. The Fed has actually moved its federal funds rate to nearly 4%. This has actually triggered considerable capital flight out of Europe, and due to the current volatility in their bond market, ECB President Christine Lagarde was required to announce a brand-new form of quantitative easing (QE). This “anti-fragmentation” tool is a new form of QE where the ECB offers German bonds to buy Italian bonds in an effort to keep the fracturing eurozone together. (Source)This dollar bull run is wreaking havoc on the worlds biggest and most safe currencies. The yen, euro and the yuan are the three biggest alternatives to the U.S. dollar and all are rivals if the U.S. were to lose its reserve currency status. But the emerging market currencies are where the real pain is being felt the most. Countries like Turkey, Argentina and Sri Lanka are all experiencing 80%-plus inflation and function as terrific examples of how the dollar trashing ball injures the smaller sized countries one of the most.(Source)(Source)What Comes Next?The DXY has actually had a hell of a run over the past 12 months, so a pullback would not amaze me. Both the DXY and the more equally-weighted broad dollar index are really extended after having parabolic rises in 2022 and are both now breaking down from their parabolas. One-day chart of the DXY revealing a parabolic increaseOne-day chart of the trade-weighted broad dollar index, likewise revealing a parabolic boost(Source)(Source)Could we see a Fed balance sheet shoot to $50 trillion while simultaneously seeing hyperdollarization as the eurodollar market is absorbed?Its possible, however I think the Fed is racing the clock. The petrodollar system is breaking down quickly as the BRICS countries are racing to set up their brand-new reserve currency.(Source)Its crucial to see, this milkshake circumstance was always going to unfold. The structural imbalances in our monetary system wouldve always inevitably manifested themselves in this cause and effect of currency collapses that Brent Johnson articulated. Remarkably, I believe some recent occasions have really accelerated this process. Yes, I see all the signposts that the dollar doomsayers are explaining; the dollar will pass away eventually, simply not yet. Nevertheless, lets entertain the idea that the dollar remains in truth passing away, and the USD will lose reserve currency status. Who would take over the global reserve currency of the world?(Source)For the economic factors Ive pointed out above, I dont think the euro, the yen and even the Chinese yuan are feasible replacements for the U.S. dollar. In a recent post titled, “The 2020s Global Currency Wars,” I explored the theses of Ray Dalio and Zoltan Pozsar and discussed why I believed both were ignoring the geopolitical, energy-related and market headwinds facing all the rivals to the U.S.(Source)I do believe that commodities are considerably undervalued and that we will see a 2020s “products supercycle,” due to decades of underinvestment in the industry. I also believe securing commodities and energy will play an essential role in a nations security, as the world continues to deglobalize. However– disagreeing with Pozsar here– backing money with products isnt the solution to the issue the world is dealing with. I think the U.S. dollar will be the last fiat currency to hyperinflate, and I actually anticipate it to hang on to the reserve currency status until this long-lasting financial obligation cycle concludes. To go one action further, I really believe theres a strong possibility that the United States will be the last country ever to hold the title of “global reserve currency provider” if they play their cards right. We will explore the Bitcoin Milkshake Theory in part two.This is a guest post by Luke Mikic. Opinions revealed are completely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

A strong dollar will lead to hyperdollarization.An effect of hyperdollarization is increased bitcoin adoption.A consequence of increased bitcoin adoption is increased stablecoin adoption.A repercussion of increased stablecoin adoption is increased U.S. dollar adoption!This dynamic feedback loop will eventually become an all-consuming, fiat currency black hole. Most importantly, I will explain how they all relate to the most scrumptious vibrant duo in the macroeconomic dessert place: the Dollar Milkshake satisfies the Bitcoin Milkshake.The Dollar Milkshake TheoryBy now, youve probably at seen the results that the “Dollar Milkshake Theory” had on financial markets. Johnson proposes that the U.S. dollar will be the last fiat currency standing, as sovereign nations are required to devalue and hyperinflate their own nationwide currencies to source the U.S. dollars they require throughout a global sovereign financial obligation crisis.Put extremely merely, the Dollar Milkshake Theory is a symptom of the structural imbalances present in our monetary system. In times of an economic slowdown, lockdown of the international economy or when exports are low, these other nations often have to resort to printing their own currencies to access U.S. dollars in the foreign exchange markets to pay their dollar-denominated debts.When the dollar index rises– showing that the U.S. dollar is getting more powerful against other currencies– this puts even more pressure on these countries with big dollar-denominated financial obligations. This is exactly what were experiencing today as the dollar index (DXY) reached 20-year highs.The one-month chart for the dollar index (DXY) going back to 1981 programs 20-year highs.For a more comprehensive breakdown on the Dollar Milkshake Theory and the devastating impacts its having on markets today, I committed a blog site to explaining the thesis.This milkshake vibrant produces an enormous demand for U.S. dollars outside of the nation, which enables and actually requires the Fed to produce enormous quantities of liquidity in order to supply the world with the dollars the world needs to service its debts.