Twelve trillion dollars in offshore debt owed by non US borrowers has to be repaid in a currency none of them control. Brent Johnson's Dollar Milkshake Theory says this isn't an accident. It's a mechanism, one that pulls global liquidity toward America precisely when everyone else can least afford to lose it. The institutions already sitting in dollar debt and Treasuries before the squeeze hits come out ahead. Latecomers eat the move. The theory has held up in outline since 2018. The open question by 2026 is whether a Fed cutting cycle finally reverses the straw, and who gets caught when it does.
Global Liquidity Creation Explains Why Dollars Travel Farther Than Expected
The Dollar Squeeze by the Numbers
Source: Bank for International Settlements, Federal Reserve research, SWIFT settlement data through 2025
Johnson's framework starts with something simple: central banks worldwide, not just the Federal Reserve, have spent the better part of two decades printing liquidity that eventually gets denominated, hedged, or settled in dollars. Even in 2026, with the Fed's balance sheet still elevated relative to pre 2020 levels, the dollar remains the default unit for global trade invoicing and cross border lending. That's not patriotism. It's plumbing.
- The Bank for International Settlements has repeatedly flagged offshore dollar debt exceeding 12 trillion dollars owed by non US borrowers, a figure that keeps climbing even as US rate policy shifts.
- Roughly 80 percent of global trade invoicing still runs through the dollar according to Fed research from recent years. An importer in Jakarta or Lagos needs dollars regardless of how their own currency is performing.
- The eurodollar market, dollars held and lent outside direct Fed oversight, is still largely unregulated and enormous, though exact size estimates vary sharply by source and should be read as directional, not precise.
- SWIFT settlement data through 2025 continued to show the dollar as the leading currency for cross border payments, ahead of the euro by a wide margin.
None of this liquidity creation happened with dollar dominance as the stated goal. It happened because dollar denominated debt was cheap and available for years, and now that debt has to be serviced in dollars no matter what a borrower's home currency is doing. That debt load is also why the people already holding dollar assets before a squeeze benefit most: they're positioned on the side of the mechanism that tightens, not the side scrambling for dollars to make a payment. What happens to that borrower when dollars get expensive again is the next section.
Reserve Currency Status Still Concentrates Demand During Every Stress Event
Global Allocated Reserves: Dollar vs Rest of World, 2025
Source: IMF COFER data through 2025
The scramble for dollars doesn't happen in a vacuum. It happens because the dollar is still the reserve currency of default, the place capital lands when a borrower needs to cover a dollar debt or a central bank needs somewhere safe to park reserves. Reserve currency status isn't a title handed out by a committee. It's a default that persists because alternatives keep failing to displace it. The euro carries fragmentation risk across 20 member states with different fiscal positions. The yuan remains capital controlled, which disqualifies it from true reserve status regardless of China's trade volume. The yen faces demographic headwinds that limit its appeal as an alternative anchor. So capital fleeing instability keeps landing in the same place, by elimination rather than enthusiasm.
- The IMF's COFER data through 2025 still shows the dollar holding close to 58 percent of allocated global reserves, down from over 70 percent two decades ago but still commanding a lead no other currency approaches.
- US Treasury holdings by foreign governments, led by Japan and mainland China, remain in the trillions even amid periodic headlines about diversification away from dollar assets.
- Gold purchases by central banks, particularly the People's Bank of China and the National Bank of Poland, have accelerated since 2022. That looks like a slow hedge, not an abandonment of dollar reserves.
- Emerging market central banks in 2025 and 2026 have continued to hold dollar reserves as their primary defense against currency crises, even while publicly discussing de dollarization.
The gap between the rhetoric of de dollarization and the reality of reserve composition is where Johnson's thesis gets its teeth. Countries talk about diversifying away from the dollar constantly. Their central bank balance sheets tell a slower story. Which signal should a market actually trust, the press conference or the reserve report filed six months later? The reserve data explains why demand for dollars stays concentrated. The next question is what actively pulls new capital into dollar assets on top of that existing demand, and that's where interest rates come in.
Interest Rate Differentials Pull Capital Toward Dollar Assets During Tightening Cycles
Why No Currency Has Displaced the Dollar
| Currency | Key Limitation | Reserve Trend |
|---|---|---|
| Euro | Fragmentation risk across 20 member states | Stable, no major gains |
| Yuan | Capital controls disqualify true reserve status | Limited despite trade volume |
| Yen | Demographic headwinds limit appeal | Declining influence |
| Gold | Not a currency, used as a hedge | Accelerating since 2022, led by PBOC and NBP |
| US Dollar | None structural, remains default by elimination | Still 58% of reserves |
Source: Article analysis based on IMF COFER data, PBOC and NBP gold purchase reports, structural currency assessments
Interest rate differentials are the most mechanical piece of the Milkshake framework, and the most testable. When the Federal Reserve holds rates meaningfully above the European Central Bank or the Bank of Japan, carry trade logic kicks in: borrow in a low yield currency, convert to dollars, buy higher yielding dollar assets, collect the spread. That's not speculation. It's arithmetic that institutional treasury desks run every single morning.
- Through much of 2025, the Fed funds rate sat well above policy rates in Japan and the eurozone, even as the Fed began a cautious easing path into 2026.
- Japan's yield curve control experiments and gradual policy normalization since 2024 triggered repeated bouts of yen carry trade unwinding, most visibly in August 2024, a preview of how fragile that trade can be.
- US money market funds pulled in record inflows during 2023 and 2024 as short term Treasury yields offered returns European and Japanese savers simply couldn't match at home.
- Even modest rate differentials of 1 to 2 percentage points can move tens of billions in short term capital flows within weeks, based on historical patterns in Treasury auction demand.
The mechanism works precisely because it's boring and repeatable, not because of any dramatic policy announcement. A trader in Singapore doesn't need to believe in American exceptionalism to buy Treasuries. They just need a spreadsheet. What breaks this pattern is the Fed cutting rates faster than its peers, exactly the scenario markets have been probing since mid 2025. If that cutting cycle accelerates through 2026, the capital pulled in by rate differentials starts looking for somewhere else to go, and that redirection is the last stage of the thesis.
Sovereign Debt Risk Abroad Eventually Redirects Capital Into Hard Assets
The final stage of Johnson's thesis is the part most commentators skip past too quickly. If dollar strength keeps draining liquidity from emerging markets and even parts of Europe, some of those economies face genuine sovereign stress: currency depreciation, imported inflation, debt servicing crises on dollar denominated bonds. Johnson argues this process eventually breaks something significant enough that trust in fiat systems broadly, not just in weaker currencies, starts eroding. That's the point where gold, and in Johnson's more recent commentary, Bitcoin, become the release valve.
- Gold prices moved past 3,600 dollars per ounce in September 2025 and kept climbing into 2026, driven substantially by central bank buying rather than retail demand.
- Bitcoin's correlation with risk assets like the Nasdaq has swung significantly since 2024, undermining the simple safe haven narrative even as institutional adoption through spot ETFs has grown.
- Argentina, Turkey, and several frontier markets have gone through currency crises tied directly to dollar debt servicing costs over the past three years, a pattern Johnson cites as the mechanism in action rather than coincidence.
- Spot Bitcoin ETF inflows in the US, led by products from BlackRock and Fidelity, have opened a new institutional channel for dollar capital to rotate into Bitcoin without touching offshore crypto exchanges.
Here's where the theory gets genuinely contested rather than simply descriptive. Johnson's own framework predicts dollar strength first, hard asset strength second. Gold and Bitcoin don't necessarily rally while the dollar is winning. They rally after the dollar's pull has extracted enough damage elsewhere that confidence in the entire fiat architecture, not just in weaker currencies, starts cracking. That sequencing hasn't fully played out as of September 2026, and reasonable analysts disagree on whether it ever will in the clean, linear form Johnson originally sketched back in 2018.
The question this post opened with was whether a Fed cutting cycle reverses the straw, and who gets caught when it does. The mechanism points to an answer: institutions already holding dollar debt and Treasuries before the reversal will have time to reposition into gold or Bitcoin as the release valve opens, while offshore borrowers who spent the tightening phase scrambling for dollars will be last to move and most exposed when sovereign stress abroad turns into the fiat confidence crisis Johnson describes. Whether that second phase arrives on the clean timeline Johnson drew in 2018 is still unresolved. But who wins and who gets caught isn't a matter of timing. It follows directly from who was positioned before the squeeze began.
This article is for informational and educational purposes only and does not constitute financial, investment, or legal advice. The views expressed are analytical observations and should not be relied upon for personal financial decisions. Always consult a qualified financial advisor before making investment decisions.