The Dollar Milkshake Theory, Revisited
Why the world's reserve currency keeps getting stronger despite every prediction to the contrary
The dollar's strength is not a sign of American health. It is a sign of everyone else's fragility.
For years, analysts have predicted the dollar’s decline. The fiscal deficit is unsustainable. De-dollarization is accelerating. The BRICS nations are building alternatives. And yet the dollar index sits near multi-decade highs, and the world’s demand for dollar-denominated assets shows no sign of abating.
The Dollar Milkshake Theory offers an explanation: in a world of excessive dollar-denominated debt, demand for dollars increases during periods of stress. The U.S. financial system acts as a giant straw, sucking capital from the rest of the world as foreign borrowers scramble to service their dollar obligations.
The dollar’s strength is not a sign of American health. It is a sign of everyone else’s fragility.
The Structural Demand
Approximately $13 trillion in dollar-denominated debt sits outside the United States. This debt requires regular dollar payments — interest and principal — regardless of economic conditions. When the Fed tightens and dollars become scarce, the scramble intensifies.
The Paradox of De-Dollarization
Even as central banks diversify reserves away from dollars at the margins, the private sector continues to borrow in dollars at an increasing rate. Official de-dollarization is being offset by private re-dollarization — a dynamic that most commentators miss.