The Dollar Milkshake Theory, a topic of growing debate on YouTube, Reddit and other social platforms, purports to offer a framework to explain the strength of the US dollar in an era of liquidity expansion. It posits that global liquidity injections - largely the product of excessive monetary easing by central banks - end up being diverted into US assets, strengthening the dollar and putting deflationary pressure on weaker currencies.
While this framework has elements of truth, the theory is fundamentally flawed. It assumes that distortions caused by government intervention are not only inevitable, but permanent, and ignores the long-term economic consequences of financialization generated by artificial credit expansion. Moreover, it misinterprets the actual trajectory of global monetary dynamics, particularly as de-dollarization gains momentum in response to U.S. fiscal mismanagement and the use of its currency as a weapon.
Artificial liquidity and bad investments
In essence, the Dollar Milkshake Theory is based on the idea that Federal Reserve policies will always create an economic environment where capital is disproportionately directed toward U.S. assets. Even so, this is not a feature of markets or superiority, but rather the distortions of expansionary monetary policy. A steady supply of artificially cheap credit and market interventions have created a global economic order in which capital is allocated not on the basis of productivity, innovation or comparative advantage, but on the relative ease of financial arbitrage within a system dominated by the Federal Reserve and other large central banks.
It is an arrangement that leads to serious malinvestment, where capital flows not to where it is most efficient, but to where it is temporarily more attractive due to manipulated interest rates and financial repression. Instead of productive investment in industries that drive organic economic growth, we see speculative bubbles: artificial intelligence stocks, real estate, U.S. Treasury bonds, Pokémon cards, non-fungible tokens and more. The problem is not only that bubbles divert investment from more deserving areas, but that they are not sustainable in the long run: the moment the Federal Reserve reverses its expansionary policies or the global financial system begins to restructure, these flows will dry up, leading to a painful
correction of imbalances.
The fragility of the dollar's hegemony
Another fundamental weakness of the Dollar Milkshake Theory is its assumption that the dollar will remain permanently dominant because global institutions and sovereign entities have no alternative. This is a mistake. Markets, when allowed to function properly, do not tolerate monopolies indefinitely. Just as inefficient firms lose market share to more competitive firms, inefficient financial structures give way to more viable alternatives. The current trajectory of global trade and finance suggests that de-dollarization is not just theoretical: it has begun.
China, Russia and a growing coalition of emerging markets have been actively reducing their reliance on the US dollar in trade settlements. The rise of currency swaps, central bank digital currencies (CBDCs) and alternative trade mechanisms ( such as the BRICS push for a commodity-backed reserve currency ) suggest that dollar hegemony is not guaranteed. Moreover, the US government's willingness to use the dollar as a tool of financial coercion ( sanctions , asset freezes and trade restrictions ) has accelerated global efforts to diversify reserves beyond the dollar. While the churning theory assumes that the dollar's dominance is reinforced through financial gravity, other spheres have their own gravity, which draws in alternatives.
Monetary competition
A better solution is not an unopposed dollar that absorbs global liquidity, but a monetary system where currencies compete freely. The current dollar-dominated system is not the result of market forces, but of decades of government privilege: Bretton Woods (1944), the informal but far-reaching petrodollar agreement, and decades of Federal Reserve intervention. (If President Trump has his way, sanctions could soon be implemented against countries using any currency other than the dollar ). In a truly free market, money would arise naturally through competition, and its value would be determined by its qualities as a medium of exchange, store of value, and unit of account, not by financial engineering or central bank intervention.
Gold, bitcoin and commodity-backed currencies are potential competitors to the dollar, which have been suppressed or marginalized by policy-driven mechanisms. While the beaten dollar theory acknowledges the dollar's capital absorption capacity, it fails to recognize that this phenomenon is itself a symptom of financial repression, rather than market efficiency. A free market would correct these distortions by allowing alternative currencies to emerge and compete without state barriers.
It is worth noting that the Dollar Milkshake Theory correctly observes that the short-term attractiveness of U.S. assets is often a product of the conditions imposed by global monetary easing. However, this long-term economic model is inefficient. The distortions generated by government intervention are persistent and lead to instability and correction. More seriously, it ignores the growing trend toward alternatives to the dollar, an inevitable consequence of free market forces fighting against manipulation and coercion.
Economic freedom is not defined by an eternally dominant dollar, but by a world where currency competition is allowed - indeed, encouraged - to flourish. The global economy is already moving in that direction, and the longer investors and policymakers rely on antiquated assumptions of dollar hegemony, the more painful the transition will ultimately be. Loose theories will only exacerbate the ultimate cost.
Peter C. Earle, The Daily Economy