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1/ The End of the "Dollar Milkshake" Theory
This thread is an attempt to visualize an endgame scenario for the short dollar squeeze anticipated by Brent Johnson @SantiagoAuFund in the Dollar Milkshake Theory.
For those unfamiliar here's a good synopsis:
This thread is an attempt to visualize an endgame scenario for the short dollar squeeze anticipated by Brent Johnson @SantiagoAuFund in the Dollar Milkshake Theory.
For those unfamiliar here's a good synopsis:
2/ The most recent layman synopsis & update can be found on @APompliano 's podcast.
https://podcasts.apple.com/us/podcast/251-brent-johnson-originator-dollar-milkshake-theory/id1434060078?i=1000469457429 .
To be clear this thread is NOT a dissent, like that of @LukeGromen, but instead an extrapolated opinion on how the theory may finally play out. I 100% agree w/ DMT.
https://podcasts.apple.com/us/podcast/251-brent-johnson-originator-dollar-milkshake-theory/id1434060078?i=1000469457429 .
To be clear this thread is NOT a dissent, like that of @LukeGromen, but instead an extrapolated opinion on how the theory may finally play out. I 100% agree w/ DMT.
3/ In short DMT assumes that the US $ will experience a historical short squeeze in relative value w/ respect to all other currencies. https://www.investopedia.com/terms/s/shortsqueeze.asp
The reasons for this are best explained in the above references. It's important to review the global status of the $.
The reasons for this are best explained in the above references. It's important to review the global status of the $.
4/ Dollar Status:
1. $ makes up 61% of all global central bank foreign exchange reserves
2. $500B US cash bills used outside of the US ($100's, 20's, etc.)
3. 90% of Forex trading involves $, being 1 of 185 currencies
4. 40% of the world's debt (loans) issued in $.
1. $ makes up 61% of all global central bank foreign exchange reserves
2. $500B US cash bills used outside of the US ($100's, 20's, etc.)
3. 90% of Forex trading involves $, being 1 of 185 currencies
4. 40% of the world's debt (loans) issued in $.
5/ Dollar Status:
5. Non-American banks have +40 Trillion in international liabilities denominated in foreign currencies, of which +25 Trillion are $
6. Fed Reserve has expanded $ swap lines during the most recent crisis to accommodate a global stimulative effort & liquidity
5. Non-American banks have +40 Trillion in international liabilities denominated in foreign currencies, of which +25 Trillion are $
6. Fed Reserve has expanded $ swap lines during the most recent crisis to accommodate a global stimulative effort & liquidity
6/ Dollar Status:
7. Oil contracts are predominantly denominated in $
8. The largest securities markets are traded / redeemed in $ terms
9. The largest consumer of oil in the world (US military) is financed in $
10. Largest holder of US Treasuries in the world are Japan/China
7. Oil contracts are predominantly denominated in $
8. The largest securities markets are traded / redeemed in $ terms
9. The largest consumer of oil in the world (US military) is financed in $
10. Largest holder of US Treasuries in the world are Japan/China
7/ How we got here. Prerequisite reading:
Bretton Woods (post-WWII):
https://www.investopedia.com/terms/b/brettonwoodsagreement.asp
The Nixon Shock :
https://en.wikipedia.org/wiki/Nixon_shock
Federal Reserve Liquidity Swaps:
https://en.wikipedia.org/wiki/Central_bank_liquidity_swap
Bretton Woods (post-WWII):
https://www.investopedia.com/terms/b/brettonwoodsagreement.asp
The Nixon Shock :
https://en.wikipedia.org/wiki/Nixon_shock
Federal Reserve Liquidity Swaps:
https://en.wikipedia.org/wiki/Central_bank_liquidity_swap
8/ Signs we are approaching a challenge to $ hegemony:
1. Ongoing rise of China as it assumes a more prominent role in global trade & financial markets (virus aside on GDP slowdown)
2. A desire to avoid the inherent deficiencies caused by using credit-based national currencies
1. Ongoing rise of China as it assumes a more prominent role in global trade & financial markets (virus aside on GDP slowdown)
2. A desire to avoid the inherent deficiencies caused by using credit-based national currencies
9/
3. Concern by large foreign $ holders that $ inflation sets in (increased deficit spending / printing / US Treasury issuance)
4. China's desire to have the Yuan fully traded on the global FX markets
5. Desire by Europe, Russia, & China to transact in a new reserve currency
3. Concern by large foreign $ holders that $ inflation sets in (increased deficit spending / printing / US Treasury issuance)
4. China's desire to have the Yuan fully traded on the global FX markets
5. Desire by Europe, Russia, & China to transact in a new reserve currency
10/
6. Oil contracts priced in $ but China (largest consumer after US/EU) has announced intentions to buy oil in Yuan & settle in GOLD.
7. Russia avoiding $ trade sanctions & allying w/ China & maybe Saudi Arabia (covertly)
8. European SPV for Iran trade bypassing SWIFT system
6. Oil contracts priced in $ but China (largest consumer after US/EU) has announced intentions to buy oil in Yuan & settle in GOLD.
7. Russia avoiding $ trade sanctions & allying w/ China & maybe Saudi Arabia (covertly)
8. European SPV for Iran trade bypassing SWIFT system
11/ There is an overall macro-trend at play. The over-reliance on the $ as a reserve is starting to become abundantly clear to both domestic / foreign governments & FIs it's unsustainable. As the DMT plays out this problem will worsen & be more visible. The dam will burst.
12/ Before we arrive at my theory for post-DMT playout, here's what I don't think will happen:
1. No new fiat, debt based currency will arise to supplant the $ (neither digital CBDC nor paper)
2. No single supra-national digital asset (Bitcoin or otherwise) will be the reserve.
1. No new fiat, debt based currency will arise to supplant the $ (neither digital CBDC nor paper)
2. No single supra-national digital asset (Bitcoin or otherwise) will be the reserve.
13/
3. Gold will not be the reserve
4. Oil / energy will not be the reserve
5. No commodity will be the reserve
(see where I'm going with this)
6. There will be NO reserve.
3. Gold will not be the reserve
4. Oil / energy will not be the reserve
5. No commodity will be the reserve
(see where I'm going with this)
6. There will be NO reserve.
14/ WHY do we need a reserve (presently)?
A reserve currency simplifies international trade for all participants & limits the exposure to currency fluctuations. Reserves act as a backup for liabilities w/ the primary purpose of reserves to make payments hedge against FX rate risk
A reserve currency simplifies international trade for all participants & limits the exposure to currency fluctuations. Reserves act as a backup for liabilities w/ the primary purpose of reserves to make payments hedge against FX rate risk
15/ Zoom out & realize what are the central themes to these complex financial machinations: trust, simplicity, & most importantly counterparty risk. The interaction between collections of humans (based on geography / political unions) to trade w/out being adversely impacted.
16/ Understand the role of value. Value is the human expression of need / want or supply / demand over time & space. Value is entirely relative, multi-variate, & community dependent / network consensus. There is no fundamental / intrinsic value to anything. Value is information!
17/ If we accept value as a relative human abstraction, as information, the natural inclination of value is to flow. The inclination in times of distress is to shelter/hoard value via ossification. It's a retreat from the consensus as a hedge against uncertainty & the future.
18/ The strongest arguments against DMT are proponents of the ossification of value: Precious metals (gold, silver, etc.), deflationary digital assets (Bitcoin), illiquid assets (recessionary proof real estate like farm land), guns & essentials. All are critiques against society.
19/ I'm long humanity, long society, and long value as information theory, propagating to reflect the needs & wants of humans so long as we persist as a viable species. The alternative is clear & frankly not very interesting so my hedge is human ingenuity not gold or Bitcoin.
20/ Value, like information, wants to be free in order to maintain efficacy. It is the natural overall inclination for abstractions that exist within the minds of men. To crystallize it because of fear may be short term practical, but is long term an abomination for our growth.
21/ Philosophical tangents aside, how do we practically avoid a reserve currency & the inevitable concentration of risk? What alternative do we have as a species to get out of this trap w/out tendency to ossify value? What happens when the DMT runs it course & the $ collapses?
22/ Answer: Technologically driven value interoperability. The hegemony of the US $ will end by the mitigation of the primary problem central to it's use: counterparty risk. The demise originates in technology, not finance. Creating trust-less systems that don't concentrate value
23/ The internet is often times described as an information super highway that connects humanity across time & space. The topology of this highway mirrors the topology of commerce & information concentration: networks like FANGs, data repos, gov. communication, media, corporates.
24/ If we accept that value is information then the natural solution to a hegemonic system of value concentration is a decentralization of value on the information abstraction that is the internet. Communicating consensus via networks. The exchange of value using digital networks
25/ What does this look like in practice? Connecting global payment systems, RTGS systems, making CBDCs interoperable, automation of business contracts, software to software and machine to machine payments, eliminating 3rd party intermediaries & friction.
26/ Some of the properties of this value layer, which resides on top of the information layer, are as follows:
1. Divisibility of value into micro-payments (to reduce counterparty risk in large value transfers)
2. Route optimization in order to find the path of least resistance
1. Divisibility of value into micro-payments (to reduce counterparty risk in large value transfers)
2. Route optimization in order to find the path of least resistance
3. Minimizing slippage in exchanges between relative value units (Bitcoin to $, Chinese CBDCs to ETH, etc.). Sometimes multi-hop paths can yield lower overall slippage for illiquid value pairs
4. Pathfinding software to monitor/optimize value transfers in business & human process
4. Pathfinding software to monitor/optimize value transfers in business & human process
5. An abstraction layer that mitigates the switching costs of a single currency allowing for geographical / political non-sovereign distributions
6. Compute allocation that is efficient & dynamic (a commodity not a repository). Sharing / renting out underutilized resources
6. Compute allocation that is efficient & dynamic (a commodity not a repository). Sharing / renting out underutilized resources
7. Coincident real-time traffic confirmation of micro-transactions to ensure counterparty risk is minimized and/or rerouted on a network failure.
8. Value is tokenized energy & matter representing human outputs (national GDPs, corporate IP, human inventions/ideas, etc.)
8. Value is tokenized energy & matter representing human outputs (national GDPs, corporate IP, human inventions/ideas, etc.)
What will the world look like post DMT? It will one in which value flows across a million specialized blockchains, centralized servers, liquidity pools, governments, unions, corporates, etc. a superhighway of value competing on utility & merit.
Value to flow dynamically, morphing, growing, specializing, like life itself. Mutating, adapting, perishing, splitting, combining, and creating resilient process chains with immutable underpinnings.
Vehicles riding on this value superhighway will take many forms: Bitcoin a pseudo Brinks truck, Ethereum the UPS truck of contracts, CBDCs a reflection of sovereign GDP, all playing a role in an interoperable universe. Humans will tokenize themselves, their property, & energy.
Why didn't we just do this before? The tools for this level of abstraction did not exist when global reserve currencies were defaulted to, but they do now and there is no turning back. The failure of fiat is not a retreat to metals or bullets, its the impetus for digitization.
The Internet of Value, using software & computers, trustless engines, will be what replaces the US $ because it is the only alternative all the parties can accept. It is the only solution to the game theory problem in which people perceive a zero sum game.
This tweet is an amendment to the original thread. It describes the basics behind one possible version of the Internet of Value using Interledger Protocol (ILP): https://twitter.com/Santiag78758327/status/1264684742445842445?s=20
