I was asked to comment on US dollar swap lines to Mideast oil producers.
Statement from Treasury Secretary Scott Bessent and Two Replies
Q: Wonder if Mish Shedlock would like to take a peek at this?
A: Sure!
Secretary Bessent
Discussions with countries, including our Gulf and Asian allies, about U.S. dollar swap lines are part of ongoing, routine conversations that
@USTreasury has been having with our partners over a number of years. They are a testament to the U.S. dollar’s primacy and the strength of America’s economic shield.
Additional swap lines can benefit our nation by reinforcing dollar usage and liquidity internationally, maintaining smooth functioning in dollar funding markets, promoting trade and investment with the United States, and, in hypothetical stress scenarios, preventing disorderly sales of U.S. assets as well as disruptions to U.S. markets, businesses, and households.
Many of these countries have pristine sovereign balance sheets and large dollar holdings – larger than many major economies with whom we maintain permanent swap facilities. I applaud our allies’ foresight and watchful risk management by exploring additional financial buffers during periods of market quiescence.
Extending permanent swap lines can be a major first step in creating new U.S. dollar funding centers in the Gulf and Asia.
Dollar dominance and reserve currency status are strengthened by constant long-term initiatives, including countering the growth of problematic, alternative payment systems.
Under @POTUS, this is American Economic Leadership at work.
Comments on Bessent
- Bessent and Mideast Oil Producers are in semi-panic mode.
- There is a run on various countries who need dollars because none is coming in from oil.
- Bessent presents this as routine. The mechanism may be. But the extent isn’t.
- Here’s the key statement: … in
hypotheticalstress scenarios, preventing disorderly sales of U.S. assets. That is not hypothetical. It is the fear. - A big lie (discussed below): Extending permanent swap lines can be a major first step in creating new U.S. dollar funding centers in the Gulf and Asia.
Dollar Milkshake Reply
Goodbye, dollar milkshake theory.
In the movie Minority Report, Tom Cruise is part of a team which prevents crime before it can happen.
Fed swap lines being expanded to cover all US allies (non-allied countries have already de-dollarized their economies) prevents funding stresses before they become funding stresses.
Ergo, there will never be any “sucking” of liquidity from the global financial system into the US dollar even in a severe crisis, which means the dollar will lose its safe haven bid in times of stress.
If the world is short dollars, and the Fed supplies them, there is no consequence to being short dollars. You are actually encouraged to use dollars for carry trades, much like Abenomics did to the Japanese Yen.
The eventual outcome is the dollar becoming more of a transactional currency and less of a store of value.
This is great news for Asians. It means the end of permanent currency depreciation, making local equities more attractive relative to US assets. Pair high growth rates and favorable demographics with currency stability, and you have the perfect setup for an EM resurgence.
The Treasury Secretary does not understand the long-term implications of this Empire ending move.
Comments on the Milkshake Theory
- Mostly nonsense.
- The Mideast has not de-dollarized or it would not need swap lines would it?
- In general, it’s not that the Fed is supplying dollars per se. Rather the US runs trade deficits and the world accumulates dollars as a result. Period.
- As long as the US runs huge trade deficits, the world will continue to accumulate dollars.
- The specific problem here is that the oil producers have dollar funding needs but no dollar income from oil sales due to blockage of the strait.
The War Impact
- Iran’s closure of the Strait (through which ~20% of global oil normally flows) has stranded tanker traffic for most Gulf exporters. Alternative pipelines help Saudi Arabia somewhat, but not enough for everyone.
- Production cutbacks, damaged infrastructure (from strikes), and shipping/insurance issues have slashed export volumes.
- Result: Big drop in dollar revenue inflows, even with higher per-barrel prices for whatever still moves.
This creates temporary dollar liquidity mismatches:
- Governments and banks still have ongoing USD obligations (imports, debt payments, investor payouts, funding for diversification projects).
- Without steady oil dollar inflows, the Mideast oil producers might need to sell US assets (Treasuries) in a disorderly way — which Bessent explicitly wants to avoid, as it could hurt US markets and interest rates.
- Prolonged shutdown worsens this: reserves get drawn down, pressure builds on currency pegs, investor confidence dips (hurting hubs like Dubai), and non-oil sectors (aviation, tourism, ports) suffer from strikes and disruptions. responsiblestatecraft.org
This is not an Immediate Crisis but we could get there with messy political ramifications even if there is little risk in the swaps.
The requests are largely precautionary and political:
- The US and the Mideast prepare for a longer war, in different ways.
- Oil producers are absorbing hits from a conflict they didn’t start.
- In addition to oil-related inflation, allies puts additional pressure on Trump to make a deal.
- This is not just a US-Iran-China thing as widely debated on X. The idea the US is gaining something on China is preposterous.
- There is no dollar upside from this.
- Trump’s ridiculous bluff is Iran is desperate for peace talks, but he doesn’t care.
Brilliant or Routine?
Bessent’s Two Lies
- Extending permanent swap lines can be a major first step in creating new U.S. dollar funding centers in the Gulf and Asia.
- Dollar dominance and reserve currency status are strengthened by constant long-term initiatives, including countering the growth of problematic, alternative payment systems.
The idea that the Mideast will become a dollar funding center is a joke.
Alternative payment systems are actually little threat now. However, the idea that that the US has constant long-term initiatives to strengthen the dollar is also a joke.
The fact is, the world is desperate to get off dollars. But the second fact is that is extremely difficult to do so given massive and persistent trade deficits and fiscal deficits.
That combination is what’s flooding the world with dollars. This is why I proposed a slow drip theory.
Slow Drip Abandonment
- Trump’s actions have increasingly alienated US allies. Countries are genuinely sick of Trump, for the right reasons.
- The US has weaponized the US dollar (both Trump and Biden did this). Countries are fearful of getting caught in the crossfire.
- Tariffs and tariff avoidance.
- Trump has turned the US into an unreliable trading partner with his repeat threats, contradictions, and constant position shifts.
- America First has become a “My way or no way” set of demands, not negotiation tactics.
- China’s direct trade with the US is down and heading further down as a direct result of points 1 through 5.
- Importantly, it’s not just petrodollars. There is pressure on all dollar-denominated transactions.
- The US no longer imports much from the Mideast. So, the Mideast accumulates less dollars directly from the US. This is actually a US success story.
- There is no replacement in sight for the US dollar losing reserve currency status.
- There is a global incentive to shift away from dollars, when and where possible.
When and where possible is the key component of the slow drip abandonment idea. Dollar avoidance is not that easy or it would have happened in a major way already.
Trump has turned the US into an unreliable trading partner.
There are long-term consequences to Trumps threats. One of those consequences is US dollar avoidance.
Death of Dollar Silliness
Despite the above, the idea that the yuan will soon replace the dollar as the world’s reserve currency was then, and still is ridiculous for currency reasons, political reasons, and economic reasons.
I discussed the yuan, reserve currencies, and petrodollars recently. It’s worth a quick look.
Petrodollar Myth and Reality
Please consider What Does CFR’s Brad Setser Say About Petrodollar Myth and Reality?
In the post I compare comments made by Brad Setser to comments I made in a previous post.
“The glory days of the petrodollar are over,” says Brad Setser CFR fellow.
Myths around petrodollars persisted long after they had lost most of their substance: the 1970s deal between Saudi Arabia and the United States to price oil in dollars never dictated the accumulation of dollar reserves in East Asia, and it should be clear by now that the U.S. commitment to defend the Saudis is based on much more than dollar pricing of oil.
Mish – US Independence
Direct Gulf state accumulation of dollars from the US has declined because the US is now largely (but not totally) oil independent. The US buys more from Canada for our needs than the Mideast.
Thus, the Gulf states are now dependent on Europe and Asia (especially China and India) for oil sales instead of the US.
Setser – US Independence
The U.S. is now a net oil exporter, not an importer, and has no direct need for Saudi supply.
The Saudis today are borrowers rather than lenders, big issuers of dollar-denominated bonds not buyers of Treasuries.The Gulf monarchies are more equity investors than “bankers” to the world.
Mish – Oil Transactions
Oil ranks among the top traded commodities by value, but it represents a modest slice of total global trade (goods + services).
- Global Trade Total: Roughly $35 trillion (2025 UNCTAD estimate).
- Oil’s Share: Roughly $1.31 trillion for crude (OEC data for 2024) That’s about 3.7 percent of total trade.
- Mideast Assignment: Let’s generously assign 60 percent of that $1.31 trillion to Mideast petroyuan. The Mideast petroyuan would then be 2.2 percent of total global transactions that was a previously mix of dollars and euros.
The dollar share of global transactions as measured by payments is 50 to 60 percent. That would make the dollar-related transaction hit 3 to 4 percent.
Q: That’s it?
A: Yes. Even if 100 percent of all Mideast oil transactions were priced in yuan, settled in yuan, and reserves held in yuan, global US dollar transactions would only decline by 3 to 4 percent.In contrast to the theories of Brown and Choyleva, I see a continued slow drip abandonment of dollars.
Setser: The Saudis today are borrowers rather than lenders. The Gulf monarchies are more equity investors than “bankers” to the world.
That directly contradicts nonsense from Bessent.
“Déjà Vu all over again”
No fundamental requirements have changed. Yet, here we go with “Déjà Vu all over again” on the petroyuan discussion.
The one thing that has changed is the desire to avoid dollars has grown stronger. There is a definite leak in the US dollar desirability boat.
But it’s a slow leak. And the petroyuan has little, if anything, to do with it.
Rather, persistent fiscal deficits and Trump’s treatment of allies have everything to do with it. The US has weaponized the dollar with sanctions on Russia and China.
Trump and Biden are both guilty of excess sanctions and weaponizing the dollar, but the origin of this mess starts well before either of them.
What to Do About It?
Gold provided an enforcement mechanism that would have ended trade imbalances.
No one wants to go back to gold because every nation and central bank wants to inflate at will.
China (and the world) would greatly benefit if China voluntarily stopped its export mercantilism. But China won’t.
Until this setup blows up in a global currency crisis, expect continual small leaks (unrelated to oil) in global dollar-denominated transactions.
When? I don’t know. Nor does anyone else.
Expect More Oil Priced in Whatever Silliness
Meanwhile, relentless Déjà Vu hype over meaningless “oil priced in whatever” nonsense will continue for many reasons.
- Hype sells
- Death of the dollar theories and conspiracy theories are sexy
- Petrodollar theories are like religion, not easily abandoned.
- Authors promote nonsense to sell books
- People hear something interesting and think they are geniuses for passing it on.
Who’s Really Desperate for a Deal?
As for Trump’s obvious bluff that Iran is desperate for a deal, please see Is There Any Point to the Latest Peace Negotiations With Iran?
Trump wants Iran to say what’s on the table. The opposite is true as well.
Both sides think they have an advantage here. But only one side has elections to worry about.
Regardless, as long as both sides think they have an advantage, we are essentially arguing over the shape of the negotiation table.
I had an exchange with AI (GEMINI) and here is a copy of the entire thread about The DOLLAR MILKSHAKE THEORY. It begins with a a question from me and then AI asks me my opinion. Here it is, copied in full:
QUESTION:
Many financial Pundits seem to be bad-mouthing Brent Johnson’s Dollar Milkshake theory. Are they right or wrong or is Brent being accurate with his theory?
AI ANSWERS:
The Dollar Milkshake Theory, popularized by Brent Johnson of Santiago Capital, is one of those macro frameworks that polarizes experts because it challenges traditional economic “common sense.” Whether the pundits are “right” or Johnson is “wrong” depends on which timeframe and specific variables you focus on.
As of early 2026, the debate has intensified due to the dollar’s performance and the massive debt burdens of foreign nations.
The Core Logic: Why Johnson Might Be “Right”The “milkshake” metaphor describes global liquidity as the milkshake and the U.S. Dollar as the straw.
The Pundits’ Counter-Arguments: Why They Say He’s “Wrong”Critics, including mainstream economists and some gold bugs, point to several flaws:
Comparison of Outlooks (2026 Perspective) Feature
Dollar Milkshake Theory (Johnson)
The “Bearish Dollar” Pundits
USD Trajectory
Violent move higher (a “melt-up”) before a final crash.
Steady, structural decline due to debt and inflation.
Global Impact
Foreign currency collapses and sovereign debt defaults.
A shift to a multipolar world with many reserve currencies.
Role of Gold
Rises alongside the dollar as a “hard” safe haven.
Rises because the dollar is failing.
The Outcome
The U.S. “eats” the rest of the world’s capital.
The U.S. loses its “exorbitant privilege.”
Export to Sheets
The Verdict: Accuracy vs. TimingBrent Johnson’s theory is often praised for its mechanical accuracy regarding how the “plumbing” of the global financial system works (the Eurodollar market and debt obligations). Where he often gets “bad-mouthed” is on timing.
Markets can stay irrational longer than investors can stay solvent. While the “milkshake” effect has played out in bursts (like in 2022 and early 2024), the total collapse of foreign currencies hasn’t happened as quickly as some of his followers expected.
Summary: Johnson is likely accurate about the mechanism (the straw), but the pundits might be right about the geopolitical shift (the milkshake is being moved to a different glass).
AI ASKED ME:Do you feel the recent push for digital currencies (CBDCs) supports Johnson’s view of more control, or does it give other countries a way to escape the dollar “straw”?
MYPOSITION:
I think that the CBDC’s will HAVE to be denominated in US DOLLARS due to the US-DOLLAR DENOMINATED WORLD debt.
AI ANSWERS:
That is a high-conviction take, and from a mechanical standpoint, you are touching on the “gravity” that keeps Brent Johnson’s theory alive.
Your logic aligns with the idea that you cannot simply “opt-out” of a currency if your debts are written in it. If a country or corporation owes $100 billion, they don’t just need “money”; they need U.S. Dollars.
However, the landscape in 2026 shows a massive tug-of-war between that debt necessity and technological workarounds. Here is how that plays out:
1. The “Debt Gravity” Argument (Your Point)You are largely correct regarding the existing $100+ trillion in global dollar-denominated debt.
2. The CBDC “Escape Hatch” (The Counter-Point)While the debt is in dollars, the trade is trying to move elsewhere. This is where the pundits argue Johnson’s theory might hit a wall:
3. The “Denomination” ConflictThere is a subtle but vital distinction in your premise:
The “Milkshake” Summary for 2026 Factor
Supporting Your View
Opposing Your View
Debt
$30T+ in new sovereign borrowing in 2026 is mostly USD-heavy.
Nations are aggressively trying to “re-denominate” new debt in local currency.
Technology
USD Stablecoins are currently the “killer app” of crypto.
mBridge and BRICS-Pay allow trade to bypass the SWIFT/USD system entirely.
Geopolitics
The “Cleanest Dirty Shirt”: People still flee to USD during 2026’s market vol.
U.S. sanctions have turned the dollar into a “weapon,” forcing others to build exits.
The Verdict: You’re likely right that the global financial “plumbing” is still rusted into a dollar shape. Even if a country launches a CBDC, if they need to interact with the global financial core, that CBDC effectively has to act as a “wrapper” for the U.S. Dollar.
Brent Johnson would argue that this only makes the “straw” more powerful—every digital transaction just becomes a faster way for the U.S. to pull in global liquidity.
If the U.S. actually moves forward with a “Trump-era” ban on a Federal CBDC (focusing instead on private stablecoins), do you think that makes the Dollar Milkshake stronger by keeping the Fed’s hands “clean” from direct digital manipulation?
Here is the question I have: Pundits, bloggers, news person, etc. etc. have been exclaiming for weeks now that ” in two weeks the shiat is going to hit the fan with regard to the consequences of the closing of the strait” Ok, multiple weeks have gone by and life here in the USA is going along as (somewhat) usual When does this “reckoning” come? Or does any really know and its all but dooms day guess work?
Seems to me that Trump, who has the attention span of a cockroach, has already thrown in the towel on Iran. Unable to win, he’s going to walk away now and let other people clean up his mess – he has a big beautiful gold-plated ballroom to build!
See the gigantic pressure on Iran to make a deal? It’s the biggest pressure anybody has ever seen. The deal is mere seconds away.
Yes, it’s happened 6 times already!
The world is waking up to the fact that what is happening in the US may not be solely a Trump problem but an America problem. Trump got elected twice, who’s to say Americans won’t elect another wing nut down the road. You have a large percentage of the population who are uneducated, poor, and desperate and who apparently will believe anything. They also worship fame and wealth. The justice system has become political. The American economy is set up for a fall due to huge levels of debt. As America begins to lose status it will not go down quietly. Potential leaders will gain popularity by blaming the world for Americas problems al la Trump.. The rest of the world is best off to cut America out of the equation as much as possible now to minimize future damage. Undoubtedly this is a very slow process.
But it appears that it is subtly being recognized by many countries. The US system apparently allows a single wing nut to control a whole nation and impact the entire world and the checks and balances that everyone thought were there have evaporated. Ie. Congress and 1/3 of Americans are supporting this wing nut! No one in their right mind would willingly allow themselves to be at the mercy of such a country and such an electorate. Trump has created the thin edge of the wedge that is leading to the abandonment of the US as an ally and trading partner but American voters allowed it to happen twice so who would trust this rabble not to allow it to happen again?
Can world opinion be reversed? I think if a solid president can be put in place with a clear majority and a proper transfer of power for 8 or 12 years and government governs effectively and deficits are brought under control then yes. Is this likely to happen? No. Americans are, and will continue to be Americans.
CJW,
I stopped reading here…
“You have a large percentage of the population who are uneducated, poor, and desperate and who apparently will believe anything.”
…and wanted to comment. Actually, we have a large percentage of the population that earns a meager or modest living by the literal sweat of their brow who have been getting screwed over for now 18 years by ZIRP/ NIRP.
They’re not necessarily uneducated. They may lack the sophistication to invest in stonks but that is OK. They should be able to earn positive rates of return with simple bank accounts or CDs but can’t thanks to Ben Bernanke and the other clowns at the Fed.
This results in their downward economic mobility, making them poorer. And that is what drives their desperation: they are drowning. Is that their fault?
Or is it the fault of the central bank and the moneyed class with their financial engineering, don’t actually MAKE anything bullshit? We’re always going to have what you call the “poor, uneducated, desperate” as part of our society. Shouldn’t they be able to enjoy the fruits of their prosperity?
Or are you suggesting we should look down on them for not having the sophistication to offset the theft of 2-3% or more of their purchasing power every year by the Fed? It’s a zero sum gain with inflation, you know. Somebody loses.
The problem was not caused by the Fed. The problem is that from roughly the end of WWII to roughly 1980, productivity in the US exploded and those lowly, high-school educated workers income rose right along with that growing productivity. But for the last 45 years productivity has continued to grow, but the working folks income has stagnated. That increased income has accumulated in the hands of the upper 40%, but primarily in the wealth of the top 10%. It is exactly what we call the “K-shaped economy”.
There are a number of reasons for this that are tightly coupled:
With that happening in the background, Congress and Presidents Bush and Obama chose to bail-out wealthy bank shareholders at the expense of ordinary Americans during the Great Recession, and the Supreme Court cemented the K-shaped economy with the Citizens United decision.
Instead of dealing with any of this, the MSM (which includes Fox) pushes non-issues so the average American remains clueless. Fox pushing immigration, LGBTQ, and DEI as the root of all evil, and CNN and MSNOW pushing the lack of special trans and other minority rights as the source of all evil.
The population appears dumb because they are ignorant of the real problems, because the shareholders of the media want them to be ignorant. But CJW is right. The once great America is lost. It took 250 years, but we are now a rogue state dedicated to advancing the wealth of the already super-wealthy. Trump is the result, not the cause. And there isn’t a damn thing anyone can do about it.
I think in the 20th century the average individual was subsidized and up-valued, top-down, because of war and industrial needs: being well enough fed and educated to function as soldiers and factory workers in the mass global team fights that were foreseen. Hence “the welfare state” (which was as much a “warfare state”). The social contract was rebuilt around this. After WW2, this crested in the consumer society, but globalization and the digital economy (network rewards to power centers) have bright a (relative) downward revaluation of the average individual, This manifests in political power also. Any effort to reengineer this has big frictions against the underlying forces and elites.
I think ALL of that has a center in the dishonest Keynesian doctrine of economics and the central bank creation of money that it excuses. Have I been reading Mises Institute material too much?
Remember also, what Trump is doing now in the Middle East is the polar opposite of what he promised to do during his election campaign. Maybe accepting campaign promises now falls into the category of “will believe anything.” If that is so, why bother voting at all?
He’s been saying for some 40 years that the only exception to this would be Iran and nuclear weapons. He continues to say it.
Yet you overlook that and call his voters stupid.
Where do you hail from, comrade?
I did not call voters stupid. Rather I suggested that politicians like Trump are compulsive liars.
The National Intelligence Committee reported to congress that in their assessment Iran was not working on a nuclear weapon. Trump apparently chose to accept Israeli allegations to the contrary rather than accepting the assessment of US intelligence agencies.
The consequence is that now Iran probably will develop a nuclear weapon. It is the only way they will ever be safe. Note that nobody launches a war of choice against North Korea.
The only exception to what? Taking Greenland? Launching ridiculously obviously day-one illegal tariffs? Muscling companies? Dismantling the advantages of our US-based world order?
It’s not that the voters make wrong choices or are dumb.
They have no choices.
Instead of allowing corporations to donate as “natural” persons, we would do well to adopt an institution like they had during the Venetian Republic. Rulers were subject to a compulsory trial at the end of their term and convicted & punished if they were found to have lied to get into office.
About one third of the US populace seemingly remains core pro-Trump. This seems to be enough, alongside the asymmetry in Senators per voter, to maintain his grip on power. (If either party abandons the filibuster, this will stress-test the system even further, and lever it into instability even more.) I chalk this persistent power (and linked voter support) up to two main drivers: 1) voter agreement with Trump’s most basic appeal and expressed world view (as it might be expressed in about ten words: one bumper sticker), plus willingness to overlook all kinds of variations in implementation, and/or 2) impaired factual information flow (lack of discipline or ability to track statements and events from month to month). Cognitive overload and modern complexity make it easier for constant propaganda bursts (even spontaneous social media outbursts) to seem to make sense. In the wake of the postings, the Trump-aligned media voices are there to smooth and reify whatever the latest spasmodic contradictory thing was (as are the almost equally odd and silly lefties’ outputs).
Snobbery is always a good look!
Americans became the most powerful and wealthy nation in the world due to…being stupid imbeciles. Do I have that right?
We are largely uneducated, yet we have the finest universities and higher education.
We have the highest standard of living, but we’re too dumb to know why.
Your attitude is exactly why we Americans are pulling away from the world. You are not pulling away from us; we are pulling away from you. You have zero appreciation for the contributions and generosity of the average American, and you are stuck in the Frech cafe model of thinking.
And to the rest of the anti-American layabouts who comment regularly on this blog: keep dreaming and hating us, because we feed on it. I suspect most of you are Canadians which only makes me laugh.
Interesting the way you use the term “we”. America is a deeply divided country. Most Americans don’t have a high standard of living, primarily because good healthcare has become unaffordable, educational debt crushing, and salaries stagnating. Housing has become almost unaffordable for teachers, social workers, journalists, and nurses. America is a nation in decline, we just don’t realize it because the lives of older successful educated people have not changed that much. Younger generations are inheriting mountains of debt with low-income wages and ever-increasing costs. Instead of investing in infrastructure, “we” borrow trillions to buy bombs, battleships, missiles, and fighter jets that do nothing to improve our lives. This despite the fact that no nation credibly threatens us, and our ever-increasing War Department budget has long been the largest in world history.
Yeah, I’m not buying it. Democrats always bring up “unaffordable healthcare” and never go any deeper. What the heck does the ACA and Medicaid and Medicare do then? I know people who pay very little for ACA premiums and have better health care than I do, when my combined premiums and deductibles are over $25,000 a year. So it seems to me that if you do a minimum of paperwork your healthcare would be pretty darn good. I don’t know anyone who can’t get healthcare insurance. Maybe you do, but I’d like to know specifics on their case and why they couldn’t get it.
Educational debt is because people pursue unproductive degrees that have no value for employers. That’s not “America’s” fault; that’s on the students.
Real income has risen the past several years, so I don’t know about “salaries stagnating.” In fact, I don’t know anyone whose salaries have “stagnated.” Maybe I don’t ask enough people, but I don’t hear these complaints, because most corporations are desperate for good people. Yes, some sectors are not doing as well, but many others are doing very well. The trades are making more money than ever. Smart, hardworking people are making more money than ever. And, your only option is not to work for someone else. Start a small business and work hard.
The teachers around here all make six figures, work 8 months a year and have full benefits and a better pension than I could dream of. Firemen make more money than anyone. Nurses are making great money — why do you think that healthcare is so darn expensive? This idea of teachers and nurses is an antiquated view.
Finally, if you think “no nation” credibly threatens us then this is naive. China is the worst, and they would take us down in a heartbeat without all those expenditures on the military. So would Iran and Russia. “Peace through strength.”
You have a very pessimistic view on our country, and that’s your right, but it should be based on what’s actually happening, not your dislike of our current party in charge.
You clearly live in a bubble. How many people do you know living on a $60,000 salary, the median income in America? When you live and work in high-income areas, you don’t see what is really going on in the country. I know multiple people who don’t have healthcare simply because they can’t afford it, including one who is unemployed with a PhD in Physics. Europe has universal healthcare for its citizens, America does not. According to 2026 numbers, only California has an average teacher salary in six figures.
Your best argument that we need a war budget higher than all of the next ten countries’ defense budgets put together is that there are some countries who might attack us someday? Is that how a Business Man analyzes cost? It’s like saying ‘our company needs to spend unprecedented amounts of money because we have work that needs to get done’. I’m guessing you have a little more fiscal discipline than that where you work. It’s a shame our country has none.
One won’t know much about America and Americans living in a bubble like Manhattan; to really understand the country and its people one needs to travel and talk to average Americans.
The Dollar Milkshake Theory, popularized by Brent Johnson of Santiago Capital, is a macroeconomic framework that explains why the U.S. Dollar could aggressively spike in value while other global currencies and economies crumble.
Think of it as a massive global vacuum cleaner powered by debt and interest rates.
1. The “Ingredients” (The Setup)To understand the theory, you have to look at the global financial state as a giant blender filled with three main ingredients:
2. The “Milkshake” (The Mechanism)The “Milkshake” is all that extra liquidity and credit created by central banks around the world. For years, this money flowed everywhere—into emerging markets, European bonds, and tech stocks.
Brent Johnson argues that when the Federal Reserve (the U.S. central bank) stops printing money and starts raising interest rates, they effectively put a “straw” into the global milkshake.
3. “Drinking the Milkshake” (The Outcome)When the U.S. offers higher interest rates and a “safer” haven than other countries, capital begins to flow out of other nations and back into the United States. This creates a destructive feedback loop:
4. Real-World ImplicationsIf this theory plays out to its extreme, we see a “virtuous cycle” for the Dollar and a “vicious cycle” for everyone else:
AssetExpected ImpactForeign CurrenciesLose value rapidly against the Greenback.Gold/CommoditiesMay initially drop (as they are priced in Dollars), but eventually rise if the system breaks.U.S. Stock MarketCan actually rise as global capital flees “danger zones” to hide in U.S. equities.Emerging MarketsSuffer the most due to high $USD$ debt burdens.
The Bottom LineBrent Johnson’s theory suggests that we are heading toward a “climax” where the Dollar becomes so strong that it breaks the global financial system, forcing a total reset of how international trade and debt are handled.
—————Question To Mish——————–
Do you think the current global shift toward “de-dollarization” (like the BRICS nations using their own currencies) is a genuine threat to this theory, or just a temporary side effect?
Could you also point out the “nonsense” parts (your word, not mine)?
Thanks. I am trying to learn more…
In #1, most of the worlds debt is NOT borrowed in US dollars. Its quite unlikely anyone in the Euro or China or Japan is borrowing in US dollars. They borrow in their own currencies (Euro bonds, Canadian bonds etc). 3rd world countries (Brazil, Argentina etc) however do borrow in US dollars (though not all their borrowing is in US dollars).
In #2, the Federal reserve does not print money. Money gets created when banks (US and Foreign) make loans. Mish has covered this many times and I’m sure you’ll agree with that.
In #3 he’s confusing dollars for US debt. When US interest rates rise, US dollars don’t pay any more or less. But US debt (treasuries, long bond etc) does. Investors will indeed sell some assets for the safe return of US bonds/treasuries at higher rates. But other countries can offset this by raising their own interest rates even higher making their debt more attractive to investors. Also with bonds/treasuries as the cost rises due to demand the value of the coupon is lowered because of the rising cost to buy the bond/treasury so at some point it stops being worth buying (eg you buy a 1 million treasury paying 6%, if the rate goes to 7% then the treasury is worth buying up to a value of 1,150,000 since 7% of 1 million is 70K and 70K/1.125 million is 6.08% which is what you were originally getting at 6% on 1 million).
Currencies around the world will depreciate as the US dollar rises and he’s right that any US denominated debt will be harder to pay. But as I pointed out in #1 that’s unlikely to affect Euro/China/Japan/Canada etc because they don’t borrow in US dollars. For 3rd world countries it can indeed lead to default (we’ve seen Argentina do it a few times). That’s why its harder for them to get loans in US dollars and when they do they pay really high rates. But those countries with falling currencies also have another option than selling assets. Their cheaper dollar makes their exports cheaper and thus if they have things to export to the US that then can increase then they can export their way to pay off the debt.
Very helpful. THANKS! I know Brent and will forward your comments to him. I have a meeting planned to meet up in PR later this summer.
I disagree with your comment on #2. The Fed doesn’t “print” money, but it does put money in the system (and a very large amount) that has the identical effect. And since it never brings down its balance sheet, this money is effectively permanent.
QE, and lending banks reserves for lending all is the same as creating money for the economy.
QE is not the same as printing money.
Also the Fed does in fact bring down it’s balance sheet. A simple google search will show its value over time and that it goes up and down.
Well, we can respectfully disagree. When you pump direct liquidity into the system by buying Treasuries with money that did not previously exist, you have created money. When you give banks money for reserves that did not previously exist so that they can lend more, you have created money. Just because they are able to take it back does not mean that it was not created in the first place.
And, quite often, they do not take it back.
The Fed balance sheet is now roughly 7.3 times its early-2008 size and about $2.95 trillion higher than the 2019 post-QT low. So the rebuttal is simple: the Fed can shrink its balance sheet cyclically, but the evidence so far shows that QE expansions have not been fully reversed. The floor keeps moving up.
That’s permanent money in the system because the Fed never fully brings it back. As an example, what do you think would happen if the Fed brought its balance sheet back to zero, now?
We would have a money liquidity crisis.
Very clean and informative – thank you!
So what is actually swapped when there is a SWAP?
But is this true? No. Plenty of liquidity in FX markets.
They need a swap not because there is no liquidity, but because they are out of money. If they had enough Dinars, they could buy dollars, but then the Dinar would devalue and the US$ would strengthen. Alternatively, they could sell dollar assets to fund dollar needs, but the (massive) selling would put pressure on the dollar and markets.
So, a swap line is a swap of virtual currency — it is ‘temporary’ credit.
To forestall a RUN, and have an orderly unwinding instead
It is a buffer to slow down the panic and the fire sales.
Mish, it might be easier for you to comment by simply HIGHLIGHTING the Parts of Johnson’s Milkshake arguments and then tell us how they are nonsense (maybe in real world terms so I can understand it, what you are arguing).
IS the Dollar Resilient against other Currencies?
IS THE Dollar-denominated debt held by other Countries?
We Travel overseas (all over the world – – we are full-time Travelers and only own a Pusher RV here in the USA). Sometimes we are not carrying a foreign currency when we land in a foreign Airport and the Taxi Drivers and even Dining Est. will take our DOLLARS. THEY WANT THEM.
I am still seeing huge put volume and oi on HYG for May and June. We could be forming the perfect financial storm here. Financial panic in the middle east, private equity in the US melting down and the collapse of Europe and Asian economies starved of energy (oil) can crash the whole thing far worse than 2008.
The only thing to do now is to hedge and position for profits.
Got PUTS?
Or, expensive calls on the VIX or SQQQ?
Massive risk for massive reward???
You gotta pace yourself and follow the money…
https://www.barchart.com/options/options-flow/etfs?orderBy=openInterest&orderDir=desc&page=1
By the way, silver (SLV) is starting to look good again.
SOXS recently reverse split, calls on that for hedge protection might make sense with SMH index up 32% just in April.
UAE wants some benefit for all their troubles…
In short, this isn’t a country that needs to borrow money from Washington. Treasury Secretary Scott Bessent noted on Wednesday that swap lines are designed to prevent countries with large dollar holdings from engaging in “disorderly” sales of U.S. assets, a possibility the UAE implicitly raised in making the request.
Indeed, the grievance at its root is not economic, but political. UAE officials regularly stress that their country did not ask to be put in this position. Before American and Israeli bombs started falling on Iran on February 28, Emirati officials were reportedly shuffling between Tehran and Washington urging restraint. They made explicit assurances that their territory would not be used as a launchpad for attacks on Iran (though there were reports the Emirates were preparing to get into the fight with the U.S. and Israel to help open the Hormuz Strait in early April. They also stood out in that they were the first Gulf state — followed by Bahrain — to have normalized relations with Israel under the 2020 Abraham Accords).
Since Operation Epic Fury began, the UAE has absorbed more Iranian missiles and drones than any other country — roughly 90% of which targeted civilian infrastructure, according to Reem al-Hashimy, the UAE’s minister of state for international cooperation. Jebel Ali port has been struck, as has Dubai International Airport. Oil and gas infrastructure has been damaged, and the Strait of Hormuz, through which the UAE ships oil, its primary revenue generator, has been effectively closed, severing its financial lifelines.
The Emiratis are acutely aware that their pledge to invest $1.4 trillion in the U.S. economy, reaffirmed by its ambassador in Washington at the height of bombardment, is becoming harder to sustain as it simultaneously rebuilds expensive missile defense systems as well as energy and other infrastructure at home.
Beneath the financial asks and diplomatic theater, the UAE’s requests are fairly concrete. It wants Washington to acknowledge (and be prepared to help with) the economic damage its war has inflicted on a country that was not party to its decision to go to war on its much larger neighbor. It also wants to be consulted on and have a say in the terms of any deal with Iran, particularly as it relates to the Strait of Hormuz.
As al-Hashimy, the senior Emirati official, explained on ABC News, any deal with Iran “has to be a good deal” that brings lasting peace. This means addressing Iran’s “weaponization” of the Strait and its regional proxies as well as its nuclear, missile and drone programs, she said.
In other words, a deal where the Trump administration simply cuts loose and walks away from the Iran quagmire — leaving behind a battered but more hardline Islamic Republic with its military infrastructure intact — is no deal at all from Abu Dhabi’s perspective.
The UAE understands it possesses immense leverage to renegotiate the terms of its alliance with its senior partner. The swap line conversation is therefore not a plea for help, but a reminder that the UAE has options — and the means to use them.
Iran did not weaponize the strait. The insurance industry closed it after the US/Israeli attack on Iran. Now the US is keeping it closed.
Any questions?
So all those mines were laid by someone else?
The insurance industry has been open since day 1. This has been proven in multiple reports and by the statements of Lloyds of London itself.
The reality is that no one wants to risk their life by Iranian pirates.
You are either a propagandist or have no idea what you’re talking about.
there are easier ways of getting a building permit
If “The world is Desperate to get off the dollar system” because of persistent trade deficits than Trumps war against trade deficits is exactly the wrong thing to do.
Driving up oil, natural gas, fertilizer, helium prices increases US exports and revenues, reversing dollar flows out of the US. Plus it potentially supports the dollars value.
Using the dollar as a weapon only encourages the development of other exchange systems.
Things change slowly ~ than, all at once…
The Euro might be an alternative to the dollar. It is somewhat ironic that Trump’s anti-EU stance has made the EU more cohesive, so I think the risk of the Euro fracturing is quite low compared to a few years ago, though there still remains the problem that there would be some sort of fiscal union for it to be viable.
Gold could also work as a reserve currency. Nations could trade with each other in their own currencies while settling the trades in gold. This would allow CBs to retain the ability to inflate their currencies at will while also having a standard currency they can use for trade.
Can’t upset “big daddy” or risk getting fired.
Oddly enough, Trump talked up the security value of his new ballroom
In the unlikely event the shooter is a false flag, it would have been to further his argument in favor of a big beautiful ballroom.
Swap lines are being discussed more because global USD liquidity continues to be tight.
• QT slowed materially in mid‑2025
• QT effectively stopped in Q4 2025
• The Fed’s balance sheet began expanding again shortly afterward
Correct: *QE began again the week of December 3rd, 2025 and has added $172 billion to the balance sheet since.
Given that investors of the Gulf States are massively missing oil revenue, I’ve been surprised that they haven’t been selling stocks, bond, gold, etc. to fund obligations previously paid for by oil revenue…at least any selling they are doing isn’t reflected in market fluctuations so far.
So are they just borrowing money from the Fed instead?
Remember a few weeks ago when a lot of countries were declaring Force Majeure? That was done to avoid having to make payments due to war circumstances.
“So are they just borrowing money from the Fed instead?”
Yes.
Yes. About 1/2 way in. They’ve opened up swap lines rather than sell off from their sovereign wealth funds.
https://m.youtube.com/watch?v=37Qm5feukW8
“No one wants to go back to gold because every nation and central bank wants to inflate at will.”
Or said a different way: No one wants to go back to gold because it requires too much honesty. You can’t steal the value of your subjects earnings and savings.
No one wants to go back to gold because gold reserves can’t grow at the same pace as global production. Because of this, prices in gold must deflate at a rate consistent with the discrepancy between gold reserves and GDP growth. And that price deflation risks lowered income and a lowered ability to make debt payments. And that lowered ability to make debt payments means leverage to productive organizations must be constrained correspondingly. And lower leverage (debt) means lower growth. Dropping the gold standard made the current highly productive world possible. A well-ruled country on the gold standard cannot compete in GDP growth with a well-ruled country on a fiat system. An unpopular view here, I know.
It is totally irrelevant whether gold reserves grow. Similarly it is irrelevant if Bitcoin reserves grow.
Your view is mathematically ridiculous.
I told you the real reason. Gold forces fiscal sanity and governments want to inflate at will.
There is a nuance to what you suggest however. And that is the purchasing power of gold would increase over time given productivity gains. Everyone would win. What I am discussing is one is not paid in dollars, nor is the dollar pegged to an ounce of gold. Rather one is paid in ounces of gold. Wages in ounces may not rise much perhaps even negative but the ounces keep buying more. That’s what would happen on a gold standard with no deficits over time
I understand and appreciate your position Mish. I believe you overlook the problem of persistent deflation relative to debt repayment at the corporate.level as opposed to the government level. I believe we can look back to the late 19th century and early 20th to see the destructive problems caused by persistent deflation which was a repeated set of bank panics, mass unemployment and bankruptcies.
“And lower leverage (debt) means lower growth.” So you think it is beneficial in our present fiat/fascistic system that people can borrow money (created out of nothing) that nobody ever saved?
I don’t know why these alleged shooters keep missing Trump. – the guy weighs 300lbs. Helen Keller couldn’t miss.
most of the chatter on X is that it was all staged
What, another fake shooter to act as another distraction?
“we need that ballroom”
Let me guess, he was carrying an Iranian passport 🙂
He never got close to Trump as he did not get past the security checkpoint where they check for weapons.
Total amateur hour unless its staged.
Both. Guy was amateur and SS letting him get as far as he did was the staged theater.
Not staged. The guy was effectively an unemployed computer science degreed major who wrote combat RPG games on his own. There are a lot of unemployed CS guys these days thanks to AI and H1B.
Hilarious that Vance was evacuated nearly 30 seconds before Trump.
Vance can move quicker?
He had ad-Vance notice
someone or some group wants him dead TRUMP RUSHED OFF STAGE AS ‘SHOTS FIRED’
Billions of people want him dead. Billions more will when the famines from lack of fertilizer start.
Yes. That is when things will become very unsafe for Americans.
Sounds like there was an assassination attempt on Trump at the White House Correspondents Dinner
The Eurodollar share as a measurement of goods and services as part of the trade balance are peanuts compared world financial services such as derivatives, Eurodollar loans, etc.
In 2025, 60 – 70 percent of financial trade flows involve the dollars, that is credit.
89% of FX flows were denominated in Eurodollars.
31%of interest rate flows in the the dollar.The Euro has captured a higher percentage @ 38% but this is not Eurodollar weakness. It is more a cause of European banks and counterparties making bets on the OTC.
65% of exchange trade derivatives are done in Eurodollars.
The collapse of the dollar as the world reserve currency is the most hyped story in 2026 by pundits.
As Mish commented and I’ll paraphrase at this time, there is no other substitute method of a worldwide medium of exchange than the Eurodollar system.
Prepare for supply shock..
https://finance.yahoo.com/sectors/energy/articles/iea-chief-warns-biggest-energy-133112427.html
Talk is Iran has about 13 to 15 days before oil starts getting sutin risking long term oil field damages: Storage Saturation: Estimates suggest around 13 days of storage capacity left as of April 20, 2026, with key terminals approaching saturation.Production Cuts Begin: The JPMorgan framework indicates that upstream adjustments will start within 15–16 days, with curtailments accelerating thereafter.Total Shutdown Risk: Continued blockage of exports risks full, involuntary shutdowns of fields, potentially damaging them for months. Council on Foreign Relations (who recommends the Embargo and economic pressures.)
The situation is part of an ongoing blockade impacting Iran’s ability to move crude oil, which, if continued, will lead to a major supply shock and force Iran to shut in wells. Gulf News
Other talk is that’s roughly their timeline on US$ reserves as well. So Trump will be lazy (as there never was a pressing military need aside from is torn up enrichment agreement not holding back enrichment from since his first term/2008) and keep just the ebargo as these Iranian pressures get more serious.
Another point of view on Iran oil being shut-in
Trump did it before and it didn’t work fast enough then’
The US is much more acutely sensitive to these things, especially with a population wondering “why is this all happening when we won???”
Esfandyar Batmanghelidj
@yarbatman
We know the blockade won’t collapse Iran’s economy because it has been tried before… by Trump!
Iranian crude oil exports fell to zero during the second half of 2019, storage filled up, and Iran rolled back production of both crude oil and refined fuels by about half. Meanwhile, Iran was experiencing significant supply chain disruptions, job losses, and demand contraction because of the COVID-19 pandemic. It was a multi-faceted crisis, not unlike the one facing the country today.
Even so, the economy limped along for about a year until oil exports began a slow recovery. Today oil production is back at the pre-sanction levels.
The blockade was never going to cause enough pain in a short enough time to tilt negotiations in Trump’s favor. Things are pretty evenly poised and that is exactly why a deal is possible.
Trump is very happy to inflict pain on “allies” in order to try and bring Iran to give in to his demands.
The real crunch will come with the US effects when it becomes clear that “we won” does not correspond to the deepening US economic problems
The strategy of the US in every war from WW2 is shield the population from the effects and retain a free military hand. That is one reason why the US has had so many military “excursions”–little blowback beyond PTSD “warriors”. When the economic crisis is here, the admin will have failed in that domestic strategy.
As for Iran, Iran has had years of deprivation to practice austerity.
Not so much, in the US.
Our soft, pink, porky population has not endured much privation. There will be outrage.
Mish, how will all of this affect the “alleged” investments coming to the US from these Middle Eastern countries that was agreed (apparently, if it`s to be believed at all) pre Iran War?
Don’t think it’s important.
That’s just an off the top of my head comment. Have not looked at the flows.
LIV Golf League is toast.
The Saudi Arabia and Bahrain F1 races were cancelled in April and there is talk of cancellation of the last two races of the season in Qatar and Abu Dhabi because of infrastructure damage and security risks.
This would move the seasons final and deciding race forward to Las Vegas.
Add Azerbaijan in late September to the list of potential F1 cancellations…
These are huge global audience events with massive revenue and logistical hits for all involved.