The Milkshake Reloads

The Dollar Index has crashed to its lowest level since April 2022, and bears are celebrating the oncoming collapse of the greenback. Little do they know, this only makes the system stronger.

This month, amid chaotic trade policy moves and volatile global markets, the DXY (Dollar Index) has weakened considerably. The drop is mostly being driven by ongoing trade tensions with China, where both countries have imposed heavy tariffs on each other. At the same time, investors are getting nervous about the outlook for the U.S. economy, and a lot of them are moving their money into safer assets like gold and crypto.

Since the beginning of 2025, the DXY has fallen about 8.3%, and this latest dip below the 100 mark is the steepest slide we’ve seen in years. Right now, the dollar is clearly under pressure, and people are watching closely to see what happens next. Dollar bears on X/Twitter have been celebrating this move, decrying the coming end of the dollar system and rise of gold as a new global reserve currency. (Ironically, this will likely play out eventually, just not the way they think)

Peter Schiff for example on Kitco News last week proclaimed:

“Well, I mean, this is something that I’ve been predicting for quite some time now. It was inevitable. I always thought it would be an external dollar crisis that would set these events in motion. I didn’t realize that we would do it to ourselves, but we have. We’ve pricked our own bubble and there’s a lot of air that’s going to come out of it. You know, Donald Trump looked at our huge trade deficits and just concluded that the trade deficits themselves were the problem and that they must be the result of foreigners cheating us and ripping us off.”

Peter claims that the rising gold price and falling dollar are indicators that the dollar system is coming to an end; and while he is correct about the prognosis of the US fiscal situation and the fragility of the global monetary system, he is incorrect about how the dollar endgame (cough cough, my book) will play out.

Let’s briefly review the Dollar Milkshake Theory by Brent Johnson. Since the almighty greenback is the Global Reserve Currency (GRC), it is widely for a variety of purposes, including:

• Settlement of Trade

  • Invoices, bills, etc are settled in dollars

• Foreign exchange reserves for central banks

  • (think BoJ using USTs to prop up the dying Yen)

• Lending for International Debt and Loans

  • IMF, World Bank, and others lend to sovereigns in dollars

• Foreign currency exchange (Forex)

  • Most currency pairs are quoted against the dollar (e.g., EUR/USD, USD/JPY), making it central to global FX markets.

• Outright Dollarization

  • Some countries use the U.S. dollar as their official currency (e.g., Ecuador, El Salvador) or alongside their local currency.

• Remittances & Cross-Border Transfers

  • Dollars are widely used for sending money across borders, particularly in developing countries.

• Safe-Haven Asset Feature

  • During crises, investors buy dollars for safety, causing global capital flows into U.S. assets like Treasuries.

• Eurodollar Market (perhaps most important of all!)

  • U.S. dollars dominate SWIFT transactions, international bank reserves, and offshore banking systems- the offshore system is called the Eurodollar market.

  • USDs are lent into existence by foreign banks and used to finance global commerce. (Banks in Pakistan lending eurodollars to oil refiners in Iran for trade, for example)

All of this creates persistent and ubiquitous DEMAND for USDs. It turns out that demand must be met with SUPPLY, or the global monetary system begins grinding to a halt- this is what Belgian economist Robert Triffin warned Congress about 65 years ago. The U.S. has the fateful choice of whether or not to meet demand, and if they do not, global deflation soon follows.

Many attribute the blowout of the trade deficit to currency manipulation by third world countries, unfair trade practices, or exploitative labor practices- all of which are true, and definitely contribute to the deficit, but they don’t explain the whole picture. In fact, as the global monetary system becomes more and more unmoored to the fundamentals of hard money, it increasingly relies on liquidity, which in essence means dollar liquidity because the global economy runs on dollars.

Therefore, the offshoring of the U.S. industrial base (as much manufacturing output loss as a major war!) was not only done to juice US corporate profits, but it was done as a byproduct of the necessity to export dollars to the world. Fat C-suite bonuses are just a cherry on top.

In short, this means if the U.S. wants to keep the global monetary system humming it needs to keep a trade imbalance, and grow that imbalance over time if the world continues to grow faster than we do. Obviously as you can see above, this trend has been accelerating as the third world (especially Asia) joined the eurodollar market in earnest in the 1990s and 2000s.

Again, we’ve covered the Eurodollar in depth in pieces like Eurodollar 1: Origins, along with the Milkshake Returns, so you can check those out if you still want more background on both these concepts.

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In any case, the outflow of dollars feeds the eurodollar market and also provides a way for the dollars to be invested back into the U.S. as these dollars are searching for yield and the easiest place to invest dollars is in dollar-denominated instruments. This is called dollar recycling, and I’ve touched on the effects this has on the U.S. economy in depth in my Dollar Endgame book- here’s a graphic that shows just this process.

This is part of the Milkshake, and this process of recycling is part of the reason why U.S. equity and bond markets have done so well in the last 3 or 4 decades. This constant inflow of capital creates a steady bid for assets, boosting growth over the long term and sucking liquidity out of the rest of the world.