How U.S. Dollar Dominance Creates Global Financial Imbalances: The Dollar Milkshake Effect

Have you ever wondered why global capital seems to flood into the U.S. during financial crises? Brent Johnson, CEO of Santiago Capital, coined the Dollar Milkshake Theory to explain this phenomenon—and it paints a stark picture of how monetary policy creates winners and losers in the global economy.

The Core Mechanism: Why Capital Flows Toward the Dollar

Think of the global financial system as interconnected vessels filled with capital. When the Federal Reserve tightens monetary policy and raises interest rates, those higher yields act like a magnet. Capital—whether from governments, institutional investors, or corporations—seeks the best returns, and dollar-denominated assets suddenly become attractive.

Here’s what happens in sequence:

• Interest Rate Divergence: The Fed raises rates faster than other central banks, creating a yield advantage for dollar assets
• Capital Migration: Global investors redirect funds toward U.S. bonds, equities, and savings accounts
• Currency Appreciation: Demand for dollars strengthens the currency itself
• Global Liquidity Drain: Meanwhile, emerging markets and developed economies outside the U.S. experience outflows, weakening their currencies and fueling inflation domestically

The cruel irony is that countries already drowning in debt face capital flight precisely when they need liquidity most. The U.S. dollar, as the world’s reserve currency, acts as a suction mechanism—consolidating wealth while other economies spiral.

Historical Proof: When Theory Meets Crisis

The pattern repeats across decades:

1997 Asian Financial Crisis showed how dollar strength devastates emerging markets. Southeast Asian nations borrowed in dollars but earned in local currencies. When the Thai baht collapsed and the U.S. dollar rallied, debt servicing became impossible. Capital evaporated overnight.

2010-2012 Eurozone Turmoil demonstrated the same dynamic on developed economies. As confidence in the euro wavered, investors rotated into dollar assets. Southern European nations—already burdened with sovereign debt—watched borrowing costs spike as foreign capital disappeared.

COVID-19 (2020) created a temporary inversion: initial panic sent capital fleeing to the dollar as a safe haven. Yet despite the Fed’s stimulus, the dollar’s gravitational pull remained intact. The theory held even during extreme monetary accommodation.

The Role of Quantitative Easing in Amplifying the Effect

Central banks print money during recessions, flooding economies with liquidity. But here’s the twist: with multiple countries pursuing QE simultaneously, global money supply explodes. Yet demand for the U.S. dollar—the world’s primary reserve currency—doesn’t diminish. In fact, it often increases.

This creates a peculiar inversion: more global liquidity exists than ever before, but it concentrates in dollar-denominated assets rather than spreading evenly. Weaker currencies face depreciation pressure, making imports expensive and fueling domestic inflation.

Implications for Cryptocurrency and Alternative Assets

As fiat currency systems show signs of stress, cryptocurrencies gain relevance. Bitcoin and Ethereum offer properties fiat currencies don’t: they’re not controlled by any central bank and can’t be subject to the same capital drain dynamics that plague traditional economies.

During the 2021 bull market, Bitcoin surged even as the U.S. dollar strengthened—suggesting investors viewed crypto as a hedge against both inflation and currency manipulation. For non-U.S. investors facing currency depreciation, decentralized digital assets become increasingly attractive as stores of value beyond the reach of central bank policies.

Stablecoins present a paradox: while dollar-pegged, they also enable faster capital movement outside traditional banking systems, potentially mitigating some effects of the milkshake dynamic.

The Trap of Global Debt

Johnson’s key insight is that the world is structurally trapped. Developing nations have borrowed in dollars; developed nations hold dollar-denominated debt. Unwinding this system is nearly impossible. As crises emerge—whether pandemic, geopolitical tension, or economic shock—capital reflexively rushes into the dollar, tightening the noose for other economies.

The theory isn’t about American economic superiority. It’s about financial gravity: the dollar’s dominance creates its own self-fulfilling cycle. Each crisis strengthens it further until the system itself becomes unstable.

What This Means for Investors and Markets

The Dollar Milkshake Theory suggests that:

• U.S. assets will remain attractive during uncertainty, regardless of economic fundamentals
• Emerging markets face headwinds as capital cycles outbound
• Global currency weakness will pressure inflation in non-dollar economies
• Alternative assets—including crypto—may grow as hedges against currency devaluation

Whether this dynamic persists, reverses, or transforms depends on whether confidence in fiat currency systems endures. For now, the dollar’s gravity remains undeniable.