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The Dollar Milkshake Theory With Brent Johnson | RCS Ep. 28!

Rebel Capitalist Show

Dollars, Stocks & Gold

Brent Johnson is the creator of the Dollar Milkshake Theory, and he's constantly featured on Macro Voices and Real Vision. He's a gifted investor and today he shares big updates related to US dollars, the stock market, and Gold.

If you haven't followed brent on twitter yet, then now is your time to do it.

Inflation In The United States

George: All right everyone, it gives me a great deal of pleasure to bring someone back to The Rebel Capitalist that I have a tremendous amount of respect for. 

Rebel Capitalist Pro

He's very influential on my thinking. He is the CEO of Santiago Capital. His name is Brent Johnson. 

Brent, welcome back to The Rebel Capitalist Show.

Brent Johnson: Happy to be here. Thanks for having me George.

George: All right, so we've got a ton of stuff going on right now in the economy, so let's dive right into the questions.

Brent Johnson: Sounds good.

George: I've been trying to remind as many people as I possibly can going back to our last conversation, that we can have inflation in the United States. 

The prices of stuff can go up in the U.S. while at the same time the DXY is going to 110 or 120, 130, 140. 

I want to make sure people understand there are these two kinds of alternate economies for the dollar, and one thing I was thinking through…

Correct me if I'm wrong, is that the Fed could take their balance sheet to who knows where it's going with $125 billion per day in quantitative easing.  And then these stimulus packages from the government. 

But in order for the majority of those dollars to get outside of the United States, to, therefore, be additional supply in international markets, to bring the DXY down, wouldn't that have to happen through a trade deficit? 

So we're importing stuff and we're exporting the green pieces of paper?

If there's no transfer mechanism let's say because all the supply chains are down, doesn't that trap the dollars in the United States?


Brent Johnson: It traps the dollars in the United States and it makes it harder to get dollars outside the United States.

This is the doom loop, right? Right now, the U.S. has favorable policies for dollars coming in, whether it's through regulation or trade or tax breaks or whatever it is. 

We are a very hospitable place for capital, compared to other regions. No capital controls … You can always argue there are … 

There's always certain levels of capital controls but compared to most places, our capital controls are minuscule. 

If dollars come in and they don't leave, that's a way for the price of the dollar to go up because we're getting the flows in and the rest of the world's being starved with capital. 

Which is exactly the milkshake in a microcosm, right? We suck the capital up and we don't return it.

George: Yeah, it's just so many people see the dollar milkshake theory and they think that means local deflation in terms of the CPI. 

They just can't separate the two. But I just see this situation and I wanted to ask you about that because you know so much more than I do. 

As if that's even possible, that the CPI or what you buy on a daily basis, those prices let's say go up by 10, 15% per year, while maybe the prices of higher-end goods and services go down, like cars, but then the DXY just goes up and you have it still destroying all these other currencies like the Aussie dollar.

Brent Johnson: Right, yeah, so I think … I don't think we're inflation yet. 

Up until three weeks ago, we had asset price inflation. In the last month we've seen tremendous deflation. I mean margin calls is by definition deflationary, right? 

Money's being destroyed. I wouldn't say that today I'm worried about inflation, but I'm worried about inflation earlier than most people are. 

I would say I talk to a lot of people who think the dollar is going to zero and I also happen to know the dozen or so people that think the dollar's getting stronger. 

But out of most of them, the dollar bull people, most of them are not thinking about inflation.

George: Right. Yeah, exactly. They just can't separate the two.

Brent Johnson: They think the dollar goes up, asset prices crash, we'd go into a depression. 

They totally get the dollar strong theory, but they just don't necessarily buy into the … Because I think equities are going to go higher. I still say that.

George: You still say that?

Brent Johnson: I thought we would get a correction. I didn't think it would go this far, but it did. 

It might go a little bit further, I don't know. I always say I don't know for sure what's going to happen. 

I have my ideas, I have my theories, I try to test them all the time. If I get them a little bit right, hopefully I can make money. 

If I can get it really right, maybe I make a lot of money and if I get it wrong, hopefully, I don't lose too much. So I thought we were going to get a correction so we had some hedges on our equities. 

That helped a lot, but I didn't call it perfectly. It's gone down further than I thought. It might go down a little bit further but I'll tell you what. 

With asset prices down or with the stock market down 30 or 35%, we're closer to what I think is the bottom than the top, right? 

Could it go to 17,000 on the DOW or 15,000 on the DOW? Sure, it can, but I would be a buyer there because I think once the sellers are exhausted, I believe that the U.S. is going to be a net recipient of capital flows.

Now that doesn't mean we're going to get a ton of flows with world trade slowing and tariffs coming up and borders being shut. 

I'm not saying that we're going back to 30,000 on the DOW tomorrow, but relative to the rest of the world, I think we will be a net recipient of capital. 

And I think as that capital comes in, stocks will go higher. Let's imagine we go another 10% lower from here or 15%. I mean the DOW was up 11% today. Isn't that crazy? The DOW is up 11% today.

Right. So let's say we go down 15% from here, 20% from here. Easily. That could easily happen. 

Two or three days we could be down 20%. Everybody in the world that is in a position of CEO or CFO or COO, if they're not getting rid of every bad problem by blaming it on corona right now should be fired. 

Any bad thing that you have in your books that you haven't disclosed, get rid of it now. 

Write it down, say it's due to corona and just get it behind you. Like I said if they don't do that I think they're being irresponsible. 

They should get that done. 

If you get all the bad news behind us and we're priced in for Armageddon and then we just have a really bad depression rather than Armageddon, asset prices can rise from depression levels, right? Do you see what I'm saying?

George: I do.

Brent Johnson: If we're at 16,000 on the DOW, everybody's gotten all their bad news out from behind them. We've written down all the expectations and now things get a little bit better and trade starts to happen a little bit. 

I can see the DOW going up, the S&P going up. Maybe we're up to 5% from here by the end of the year. Maybe we're up 10% from here by the end of the year. 

It doesn't mean we're up for the year, but from the low level, I could see … And then now we're starting to beat expectations a little bit because expectations were that we'd continue going down.

Liquidity, valuations, and fundamentals

George: I just want to unpack that a little bit so people understand what you're saying and understand why you're saying it. 

Because I think a lot of my listeners or viewers will say, “Oh Brent, that sounds crazy,” because even if the stock market were to go down by another 10%, historically speaking it's still expensive, relative to the market capped GDP, the CAPE ratio, if you look at the fundamentals. 

Although there are probably pockets of opportunity, the fundamentals are still poor. 

Correct me if I'm wrong but what you're saying isn't that you like to go long if we lose another 20%, you think that's a great buying opportunity because the fundamentals are rock solid. We had an amazing economy, just look at the unemployment rate. 

You're not saying that. You're saying, “Yes, I get it, it's still flawed, but I think that it could be a buying opportunity because of the capital flight.” 

There's a big difference between understanding the liquidity coming into the system because it's got nowhere else to go as opposed to being bullish on the fundaments. 

I guess in short, you're bullish on liquidity coming into the system instead of the fundamentals of the underlying stock market itself. 

Hopefully, I'm right, and if I am do you want to expand on that?

Brent Johnson: Absolutely. No, I think that's totally right, and not only that, I think it would be … 

Even if you think valuations are still high, I think you got to admit they're a little bit lower today than they were a month ago. 

Valuations have certainly come down, and I have been of the opinion for a long time that the next two or three years are not about valuation. 

They're not about fundamentals. It's about survival. I think the next two or three years are going to be incredibly painful on a global scale. 

And I just think that in that environment, it's not so much about … Again, buying stocks at a certain valuation or because you like the price to sales or because the balance sheet is solid. 

I just think you want to go where you have a chance to get your capital back and I think U.S. equities might be one of those places. Again, it's not going to be the only place.

Is gold going to get a flow? Of course, it is, but the whole world's not going to put 100% of their money into gold. 

Even if we go back to a gold standard, you don't put 100% of your portfolio in gold. The stock market will still exist. The bond market will still exist. Real estate will still exist. 

Even if you think gold's going to higher and you think we're going to be on a gold standard, it doesn't mean some of these other assets aren't going to get capital flows. 

And I think one of those places that will get capital flows is U.S. equities, and so I could see valuations going to levels that nobody thought possible.


Do you think valuations in the stock market could go even higher than they were 30 days ago?

Brent Johnson: Sure. Again, not because things are good but just because that's the only game in town.

George: Right. Right.

Brent Johnson: If we get into a situation where we have sovereign defaults and the market crashes, the DOW's down a lot, but my god, have you looked at Brazil? 

Have you looked at Australia? Have you looked at the DAX? Have you looked at Turkey? Have you looked at Australia? This is not a U.S. phenomenon going on. 

This is a global margin call on the dollar. That's the other thing. 

This is not, this market crash, you can say the fundamentals were bad, you can say that valuations were overvalued, I won't argue with that. But that's not what caused this crash. 

What caused this crash is a global margin call on the dollar. Simple as that. It's a liquidity issue, and the reason there's not enough liquidity is there's not enough dollars.

There's not enough dollars inside the United States and there's certainly not enough outside the United States.

Money Creation

George: Let's help the viewers kind of understand that premise, that there are not enough dollars in the United States. 

Someone would say, “Well Brent, look at this. They're doing 125 billion in QE, they're doing a trillion a day or committing to a trillion a day in repo,” not that they're doing that. 

But they're going to be expanding their balance sheet. How can you say that there are not enough dollars in the system in the United States? 

I get where you're coming from, but I want to explain that to the viewers because I don't think they're going to understand.

Brent Johnson: In very simple terms. 

I guess to understand my theory and to understand this issue, you kind of have to understand how money's created in the first place. 

To take it back to a fundamental level, there are only about four trillion dollars that actually exist. That's the monetary base. 

There's about one and a half-trillion dollars worth of currency and physical coins, physical currency, and physical coins. 

There is another two and a half trillion, maybe a little bit more than that now, deposited at the Fed, which are reserves that actually exist, okay?

George: This would be what we consider base money?

Brent Johnson: This is base money. Everything else is loaned into existence off of the base money. 

If you want to look at M2 which is a broader definition of money, that's like $15, 16 trillion. 

That's one way to measure the monetary aggregate, but then you hear about the U.S. has 23 trillion in national debt. Well, for us to pay that off, that's essentially … Debt is essentially a claim on dollars. 

At the end of the day, it's a claim on cash flow, but there's only four trillion that exists.

It's like a game of musical chairs. As long as the music is playing and the money is spinning and you have velocity of money, everybody can get paid. 

But the minute the music stops and the velocity stops, there are only four chairs left. You got 23 people, that's the U.S. national debt, on four chairs. 

When they stop, everybody's clamoring, there's just not enough. That's just the U.S. Then outside the United States, there's another $13 trillion of debt that's a claim on dollars.


That's potentially off the same amount of base money, isn't it?

Brent Johnson: The only people that could create base money is the Fed and the treasury. 

The Eurodollar is all loaned into existence too. It's all levered off of base money. 

My point is that … If you look at global U.S. dollar debt, if you look at corporate debt and all that other kind of individual debt, bonds, all that international corporate-issued in dollars… 

It's like at least $75 trillion, it might be $150 trillion, I don't have the exact number, but the point is that … Then there's like a quadrillion derivatives and half of that's denominated in dollars.

What happens is when you get into a credit crunch. But, ok, so, there are two ways that money's created. 

There's the physical monetary base and then the rest is loaned into existence. Money is created in two ways. 

You can print it physically, and you add to the stock of the monetary base, which then frees up the ability to loan more. You can either print it or you can loan it. 

Those are the two methods via which money gets created. When you reach the end of the loaning, when you get a credit contraction, that's the opposite of money being created. It's being destroyed. 

When the loans are no longer being rolled over, money's no longer being created through expansion. 

The only way to get new money into the system to plug the hole is the Fed to come in, boom. Swap lines. Printing money, QE, whatever it is. 

That's the way they plug the hole.

My point is I don't care if they buy a trillion dollars a day. The hole's too big. You can't keep up with it. 

The other thing is these swap lines, these swap lines are not gifts. They're not giving $125 billion a day to China or to … China's not even on the swap list.

To Canada or to France or to Mexico or whoever it is, they're swaps. Swaps is just another way to say loan. 

We're giving them dollars, they're giving us Krone. We're giving them dollars, they're giving us Yen. We're giving them dollars, they're giving us Pounds. 

There's an embedded interest rate in there or … They've got to give those dollars back to us at some time. 

All of this creation through swap lines, it's just making the debt bigger, so the claim on dollars is increasing. The claim on the monetary base is increasing. 

Short-term liquidity is being provided, but demand for the longterm is also increasing. Demand for the dollar over the longterm is actually … 

They're not solving the problem, they're making the problem bigger.

Brent Johnson: My point is these swap lines, they may provide some liquidity in the short term. 

Maybe the market can get three or four months, six months, a year of reprieve, but we'll just be right back where we started a year from now, and the problems will be bigger. 

There's that famous quote by … I don't remember if it's Mises or Hydek, but… I'm going to butcher it now, but “there's no means to avoid the collapse of a currency, it's just a matter of whether you do it willingly or just outright destruction of the currency.” 

You can't taper a Ponzi essentially, right? You can only try to arrest it by expanding the problem.

Look at everything they've done. Let's talk about the last year and then we'll talk about the last month. 

In the last year, the Fed completely pivoted. You had Donald Trump attacking the dollar saying it needed to go lower. You had this Fed repo facility that was enacted. 

You had this special purpose vehicle in Europe that allowed … Was supposedly going to allow Iran and Europe to trade oil with each other which as far as I can tell is being used on a minuscule level. 

But you had all these things and you had the Fed pivoting as far as tightening versus weakening, and yet the dollar finished the year higher.

Now in the last month, I can't even keep track of everything that they've done in the last month. 

Repo facilities that are unlimited, buying $125 billion a day, doing open-ended QE, buying corporate bonds, talking about buying ETFs… A fiscal stimulus plan of $3 trillion, and look where there dollars at? 

It's at a three year high. It's looking at these things and it's laughing. Because the demand for dollars is so enormous. 

And I know there's a lot of people who are listening who say it's toilet paper, it's no good, it's fiat currency, it's going to go to zero. Yes, yes, yes. Eventually, it will. 

But right now, as much as you may want everybody to go to gold, the world is not going to gold. 

Gold is going up, it's getting a bid, but they're not … The whole world is not transferring to a gold standard overnight and so until that happens you need dollars to operate in the world.

A lot of people will talk about you look at the COMEX and there's like 180 times demand for physical as there actually is physical stock at the COMEX. 

They say if people ever stood for delivery, the price of gold would go to $15,000.00. Absolutely true. 

I completely agree. That same dynamic occurs in the United States and around the world in the form of dollars, meaning paper dollars versus that monetary base or demand for dollars versus that monetary base. 

And the ratio of the monetary base to the demand for dollars makes that demand for gold over the reserves of gold at the COMEX, look like child's play. 

What you're seeing play out right now is exactly that. Everybody's standing for delivery in dollars. Everybody wants to get paid. 

Everybody wants the dollars and wants to hold onto them and that's why you saw the dollar starting to rise. And that's why you saw people liquidating assets at whatever price they could get and margin calls being forced. 

That's why you saw gold getting sold off, that's why the miners got sold off. Because literally, it didn't matter the price, you just needed cash under all circumstances. 

When I say cash, I mean dollars. You needed dollars.

Brent Johnson: You have that thing that I was talking about, all of those claims on only that $4 trillion of monetary base. 

The thing that people are constantly waiting to see in gold, which I agree will eventually happen, is currently playing out in dollars, and you can see it. 

That's why you've got the central banks around the world freaking out because there are not enough dollars to go around. 

I don't know if I've explained that correctly or not but that's kind of how I see it.

Dollar Debt Versus Base Money

George: Yeah, for sure. I want to unpack a couple of things. 

First of all, the FX swap lines. Just pretty simple, the central bank, the Fed goes to the bank of Japan and says: “Listen, we'll trade you some dollars for some yen because you guys, you have corporations.” 

Let's say, that have borrowed in dollars and their revenue is in yen and they need to make their dollar payments to the lenders and they don't have any dollars to pay the lenders. 

So they go to the central bank, the BOJ, and say, “Listen, we've got some yen but we need dollars,” and they say, “Well, we're out, we don't have any.” 

So that's why the Fed sets up those swap lines. I just want to make that clear first and foremost. 

I guess going back to there not being … There's this huge hole to your point and all of this demand in the form of debt for dollars versus the amount of base money. 

So it's that game of musical chairs. I think that was a great way to put it. You got 23 people in a game of musical chairs and only four chairs. 

But does the Fed have the ability to create 23 chairs or 46 chairs and put them out there? 

I know they have the ability to do that, but…

Do they have the ability to get those additional reserves into the system to where it actually matters?

Brent Johnson: There are two questions there. 

First of all, they do have the ability to do it, but do they have the political capital to do it? 

Again, I would say go back and look at any time that currency in a country has been devalued overnight. 

If you come out and you print $50 trillion or $35 trillion, whatever the number is, overnight, that's going to devalue the dollar overnight. 

Do you think that … Well, with COVID going on you never know, but do you think that the populace is just going to sit back and say, “Okay, no problem?” 

No, whenever that happens, you typically see riots in the streets. You see people protesting against the government in power. 

Like when Chavez did this in Venezuela and now Maduro in Venezuela. It's not done with the people lovingly adoring him. 

He still does it, but it's typically not done because people love the leader who does it. I mean think about the inflation that would cause, right? 

Look back to the Arab Spring, was that seven or eight years ago now? A lot of that was caused because of inflation. 

Food prices were going up, medicine prices were going up, gas prices were going up because they were devaluing the currencies. 

The currencies were losing value and that translated into social upheaval. The ability to do something and actually doing it are not always the same thing. 

I think that while the Fed may come out and do whatever they can do to help the U.S., it becomes increasingly difficult for them to bail out the rest of the world for political reasons. 

Not the least of which is the guy in the White House. I mean, I don't know if you know this or not, but in the NAFTA, the new NAFTA agreement was signed between Canada, the United States, and Mexico… 

I don't remember the exact name of it but he redid that a couple of years ago, right? 

There's a currency provision in there that says Canada and Mexico or maybe even the U.S., you can't devalue your currency. 

If you devalue your currency, the deal is in effect not terminated but the deal is off so to speak. I don't know if you've seen Mexico's currency lately or Canada's currency lately.

It's getting crushed against the dollar, right? When this COVID thing passes and Donald Trump is trying to create jobs again, do you think he's going to look at Mexico and Canada and say, “Oh yeah, we're still good friends.” 

He's going to say, “Yeah, you're stealing our jobs because you devalued your currency by 15%.” 

They're going to say, “We didn't devalue our currency. The market did that.” Donald Trump's going to say, “I don't care.” 

You know what I mean?

The Dollar Milkshake Theory

George: Brent, let me say one thing on that because I don't want to forget and lose my train of thought because it's such an important point. 

I hear a lot of people on social media, Twitter, and comments on my YouTube channel say: “Listen, this is great because this is going to show all Americans that we can't rely on goods from China, from Mexico, from all of these other places. 

Look, we don't have enough face masks. We don't have enough ventilators because they're all made in China.” 

But I want to get your feedback on this to see if my thinking is clear, but if we started producing all of these goods. 

Let's just say we could wave the magic wand and somehow manufacture all that stuff and it wouldn't cause just massive inflation locally, but let's say we could do that. 

Then all of a sudden it goes back to this issue:

How do we export dollars? 

If we created 100% of the stuff that we need on a daily basis in the United States, there's no transfer mechanism to get dollars outside of the United States. 

Therefore, the DXY just goes ballistic because then you'd have all of that debt. You'd have even fewer chairs for the people that were walking around outside the United States.

Brent Johnson: You're describing the milkshake theory.

The Fed’s interventions, MMT, and money in the real economy

George: All right, well I'm glad I'm seeing it correctly. 

How could the United States or the Fed, get money from reserve accounts into the financial and real economy? 

To see if we can maybe poke holes in it so … The way I understand money creation correctly, the Fed comes in, they increase the digits, the reserve accounts for the primary dealers, but it's up to … 

This was before all the four-letter solutions and acronyms that we came up with last week. But prior to that, they pretty much go between the Fed and the primary dealer. 

The Fed could create a quadrillion dollars but unless the primary dealers actually took action, meaning they lent it into existence or they bought financial assets with the excess reserves. 

That creates a deposit in the real economy. Then it's actually money that can be used but if the primary dealers don't take action, then it's just like the Fed prints a quadrillion dollars and stuffs it under their mattress.

Brent Johnson: That's exactly right. Exactly right.

George: Now we've got all these acronyms and abbreviations and the list is just insane. 

So now I think the Fed has a way to transfer that into the real economy directly without going through the primary dealers. 

Do you see it the same way or can you expand from that?

Brent Johnson: There are two issues here. 

This is actually going to lead to another issue which I think is going to happen over the next couple of years, which I think is going to be fascinating. 

And that is the treasury versus the Fed. Right now, the way the Fed does it is the Fed does QE, they buy bonds from the banks, the banks give the bonds to the Fed, the Fed gives the dollars, newly created dollars to the banks. 

As your point, it creates reserves but it doesn't necessarily end up to the people. One thing that the Fed can't do but the treasury could do, and which you've seen them talk about it, they've talked about sending all individuals $1,000.00 or married couples of four $3,000.00 or something. 

But that's not the Fed, that's the treasury.

Now maybe they're kind of working a little bit hand and hand, but the treasury is the only one that can write checks. 

The Fed can create money out of thin air and have it deposited into the bank account, and I guess theoretically the bank, the Fed could create money and they could buy stuff from our brokerage accounts. 

So if they started buying corporate bonds or stocks or whatever, I guess they could say we will buy them from retailer brokerage accounts rather than just primary dealers. 

That's nowhere close to happening but it could happen. Helicopter money comes from the treasury, not from the Fed. 

First of all, I think the whole idea the treasury and Fed are independent of each other, I think it's utter bullshit for lack of a better word, apologize.

George: I know.

Brent Johnson: That's a very pleasant fiction, maybe is the right way to say it, right? I think that fiction is going to crumble to the ground over the next couple of years.

George: Just like we don't monetize the debt, right?

Brent Johnson: Right, right. If you really believe that, then I'm not sure why you're watching this channel. 

That said, even though I think they do kind of work in concert with each other and I think they probably talk to each other more than people are willing to admit, neither one of those organizations wants to play backseat to the other. 

No organization willingly gives up power other than maybe George Washington. 

Is there anybody in history who gave up power? No, you always want more, right? 

The idea that the treasury is going to start doing these MMT or checks for the people or helicopter money for the people and start to a certain extent taking monetary policy away from the Fed, I don't think the Fed's going to like that. 

They might be okay with it initially, to give them some help, but let's say it starts to work and people say, “Oh we like this,” and the market starts to go up a little bit and inflation picks up a little bit. No, listen. 

It will be a disaster longterm, but typically, these programs, when you first start them, they actually do help a little bit and that gives it the aura of being the right thing to do. 

It's actually the worst thing to do but it tricks people into thinking that this is the magic solution.

If all of a sudden treasury starts doing these and it seems to work a little bit, Mnuchin did it rather than Powell doing it, what happens six months from now or nine months from now when Trump wants Powell to lower interest rates again or do something? 

And Powell doesn't want to do it and Trump says, “Okay, that's fine, I'll do it myself. I'll have Steve do it. I'll have Steve do it. Steve, go send everybody $10,000.00.” 

MMT is when the government just spends the money into existence. They don't give it to the Fed, the Fed doesn't go out and buy bonds, they don't sell treasury bonds and get the cash from the people. 

They just spend it. This is the treasury doing the magic show the way that the Fed currently does the magic show. That's one of the things with MMT. 

I think MMT is going to create a battle between central banks and fiscal authorities.

George: Right, but, maybe I'm not understanding it correctly.

But the treasury would have to issue debt through an auction so they'd have to issue a treasury bond?

Brent Johnson: That's the way it is now, but in MMT, they just tell the bank here's $1,000.00 check, or the person, here's $1,000.00. It's just boom. Now you got money.

George: Right, but you'd have reserves on the other end of that because that would be a liability on the bank's balance sheet or the retail bank's balance sheet.

Brent Johnson: Right. That would sit at the Fed, but my point is the Fed creates money by making loans or by buying assets. 

The treasury is the only one that can print currency.

George: Print physical currency?

Brent Johnson: Yeah, or they could just … When they write these checks to people, that's going to come from the treasury. That's not going to come from the Fed. They're not borrowing that money. 

They could but, they don't have to. I encourage people to go and read up on MMT because it's a point where money gets spent into existence rather than loaned into existence. 

It sounds similar, but it's completely different because you're not adding to the national debt. 

What MMT people say is the only limitation on spending money into existence is not the interest rate on the debt, but the interest rate on inflation. You've got similar dynamics. 

The Fed, central banks, manage monetary policy via interest rates and inflation. But treasury would just spend it into existence and the only curb on them would be the inflation rate. 

They spend as much as they want as long as it doesn't create a massive amount of inflation.

George: I see, okay. Just so I'm following you here, what happens now and what's happened in the past is the treasury, if they're running a deficit or they need to roll over debt, they'll go ahead and have an auction. 

The market makers, the primary dealers, by law, I think it's by law, they have to buy that. 

And then if the Fed wants to keep interest rates down, they'll go ahead and buy it directly from the primary dealers, kind of the shell game. 

The money, the electronic money then goes on to the TGA which is the treasury general account which is actually at the Fed. It used to be in the private sector.

The bottom line, it's not creating more deposits where it actually used to create more deposits. 

That was done back in 2008, but you're saying that moving forward, if we go into this MMT type world, the treasury might not even issue debt, they just go ahead and credit the bank accounts in the retail sector.

Brent Johnson: I'll give you an example.

George: I'm just trying to think it through.

How would they get the reserves at the Fed to balance that out as an asset?

Brent Johnson: This is how it happens. Let's say that the treasury … 

If you've ever gone to Washington, D.C., or even any big city, you see the federal building and it's all Chrysler cars or Ford cars out front because that Chrysler and Ford, American car companies get the contract to buy government-issued vehicles, right? 

Let's say that the federal government needs 10,000 new cop cars or whatever it is, right? 

They go to General Motors and they say, “Here's a billion dollars.” Boom, it's in your account. Now it's sitting in the bank account. 

Now, General Motors, whoever their banker is, that bank will have reserves of the Fed. But you're skipping the Fed. 

Instead of going from the treasury to the Fed to Ford, you're just going straight to Ford. 

You're just crediting Ford's bank account and then what Ford does with the money from there, that's up to Ford.

George: Yeah, so the treasury would have the power to increase the excess reserves held at the Fed without the Fed even printing more money or doing quantitative easing.

Brent Johnson: Exactly. That's just one example. 

There are many different ways that this can happen, and again, I'm not the world's foremost authority on MMT. 

But I know one of the main differences between MMT and traditional monetary policy is that you're spending money into existence rather than loaning money into existence. 

And you're controlling the value of the currency. You're using the level of inflation rather than the interest on the debt in order to manage the monetary supply so to speak.

George: I think you're managing the monetary supply through taxes, in the sense that you get too high of inflation, then you've got to juice taxes up to get more of that money back at the Fed or the treasury. 

So it can be held underneath the mattress or just destroyed.

Brent Johnson: Think about this too. That is also a way. 

The MMT or we talked earlier about a digital coin, the Fed being able to issue a digital … That's a way to get money distributed internally to the United States, but not bailing out the rest of the world. 

And without having to increase the national debt, so you don't have additional interest expense to service.

But, the rest of the world still needs dollars.

George: Yeah, so that's where I'm going.

Brent Johnson: That's my point. This is a way to get money internally and you get the velocity of money to pick up internally and you get inflationary effects internally and asset prices start to rise internally. 

Which makes people outside the United States say, “I want to invest there because it's going up. I've got deflation here. 

Even if their asset prices don't go up but my Colombian peso goes down 10% and I'm invested in Coke who pays me a 4% dividend, I'm making 9%.” 

That doesn't sound too bad, right?

Inflation And The Price Of The Dollar

George: Right, I do, I totally get it. 

What happens if we start to get inflation in the United States while the dollar is potentially going up outside the United States? 

When all of those entities that have dollar-denominated debt outside the U.S., if they see that, the next time they go to roll over that debt, do you think they'll still roll it over into dollars? 

Or do you think they might roll it into a different currency?

Because they see the dollar as a little riskier because of what's happening inside the U.S. and the MMT?

Brent Johnson: Sure. Maybe they do but they're going to have to pay a higher rate if they don't do it in dollars, when they're already under pressure. 

So you're going to pay a higher rate, because who wants Colombian pesos? 

I mean no offense, don't get me wrong. People in Colombia do, but do people in America want to buy a bond that's issued in Colombian pesos or Norwegian krone? 

A few people do, but there's not going to be global demand for Indian rupee bonds. There's just not. 

I've been accused of being jingoistic, this exceptional America, we're better than everybody. It's not the way it is. I don't believe that at all. This is just the way the system is. 

I don't like it, but this is reality. George, I don't want to be hyperbolic, I think this is the biggest trade in history. I really do. 

It is the biggest short position in history and so in order to get out of the biggest short position in history, you have to pay off the short. 

So all of these countries that you're talking about, even if they want to, when they roll the debt, let's say they want to roll it into krone or they want to roll it into pesos or they want to roll it into yuan. 

In order to roll it, you need to pay it off first. The reason you often roll a loan in the same currency is because, in the new loan, it pays off the principal of the old loan.

George: This is a great point. Yep.

Brent Johnson: Right?

George: No, keep going. This is a great point.

Brent Johnson: My point is is that if they want to roll the currency, they've got to come up with all the dollars to pay off the principle of the first loan. 

Where are they going to get them? They don't exist.

George: Right. If I'm hearing you correctly too, taking it one step further. 

Even if they do find the dollars to pay off that debt and then go into a different currency, if you're paying off debt then you're decreasing the supply of the currency.

Brent Johnson: It gets exterminated. It gets extinguished. So the supply of dollars decreases. Which makes it even harder for the next guy.

George: Yeah. Right. Right.

Brent Johnson: It is the perfect storm.

George: Let's think about what happens in … 

If I'm going to play devil's advocate and say, “Okay, there's all this money being printed in the United States. We can see through MMT, how that would result in a lot of inflation, but how could those dollars get out the United States and maybe satisfy a little bit of that demand that we've got outside of the United States?”

If you were arguing against yourself, what would the argument be?

Brent Johnson: Are you arguing how the dollars get out?

George: Yeah. If I'm sitting there saying, “Brent, you're totally right, but I think the dollars are going to get out of the United States to satisfy some of that demand,” what would my argument be?

Brent Johnson: I think the best argument would be is that the Fed's just going to provide them through swap lines.

George: Okay.

Brent Johnson: That way or that when COVID passes, and Americans, companies start making profits again because our economy's picking up a little bit, and we take a vacation and we fly to Brazil and we maybe … 

We do still buy oil from the Middle East, right? We're kind of a net exporter but we still import a lot. 

We import the unrefined and we export the refined. Do I have that backward? 

Anyway, my point is money still does leave the United States. It just doesn't leave it at the same rate that it used to and the demand for it's higher than ever.

Oil Price And The Petrodollar

George: Yeah.

So if the price of oil and the demand for oil goes down, does the demand for dollars go down because of the petrodollar?

Brent Johnson: The demand for the dollar may go down a little bit, but the problem with the argument that if oil goes down, demand goes down, and therefore you no longer need the dollar so therefore the dollar falls is complete … Is again, completely wrong.

George: Okay, so how is that wrong?

Brent Johnson: It's wrong because you need to understand why oil is going lower. 

If oil is going lower, it's because demand for oil has dropped. Why does demand for oil drop? 

Because there's no commerce being done. If there's no commerce being done, that means money's not circulating. 

If money's not circulating, then supply is harder to get. Even if demand is falling, supply is becoming harder to get. If demand falls but supply falls more, what happens to price? It goes up.

That's only part of it. The other part is that with oil at $15.00, oil companies are not going to stay in business. 

They're going to go bankrupt, and what happens when a loan gets defaulted on? 

That daisy chain where more money gets destroyed. Again, demand falls, but supply falls even faster. 

Defaults are the worst possible thing in a monetary base where money is loaned into existence. 

Even if we go to MMT going forward, where we're no longer loaning money into existence, the problem is there's already $100 trillion that has been loaned into existence. 

Just servicing what's already been done and paying off the principal of what's already been done is a nightmare. Forget about what comes next.

This idea that oil's going to go to $15.00 and it's going to, therefore, allow China to import oil at a cheaper price and they're going to be fine and it's going to help them, it's totally off base.

Paying The Debt Versus Defaulting

George: Yeah. How does …

As far as the supply of money or the supply of dollars, currency, how does paying off the debt differ from defaulting?

Brent Johnson: It really doesn't. If we had enough money. 

Let's say that if we had enough money to pay off the national debt and we did it, we'd go into a depression.

George: Right. Paying it off though, but I'm just trying to think of a balance sheet.

Brent Johnson: No, think of it this way. There's $23 trillion in national debt. That means that there's $23 trillion of treasury bonds out there. 

That means that there's $23 trillion of somebody's asset. To the United States it's a liability but to somebody else it's an asset. 

That asset is deposited into these accounts all over the world and then it's used as collateral to loan money into existence. 

If you pay off all the national debt and that treasury bond disappears, now there's cash in the accounts, but the collateral is no longer there. 

It's hard to explain but at the moment that it happens, it would be extremely contractionary because money would be disappearing. 

It could then get loaned again very quickly, but my point is that in a debt-based monetary system, when debt is extinguished, money is extinguished. 

Whether it's extinguished via being paid off or being extinguished, it's worse if it gets defaulted on but even when it gets paid off via payoff, there's still a moment when it's just the … It's the original amount, not all the loan stuff. 

I'm probably not explaining this correctly.

George: You need a whiteboard Brent. Why do you think I use a whiteboard?

Brent Johnson: I know. Anyway, the problem with a debt-based monetary system is eventually you will reach the point at which credit can no longer be extended, and when that happens, the game is not yet over but you're getting close to the endgame. 

And the point I always want to make to people is when you get close to the endgame the thing that's most in-demand goes the highest. 

It's going to blow out, it's going to be like a supernova black hole. It's not going to last but at that moment before. 

Have you ever seen a short squeeze where the line just kept going up?

George: Right, well…

Brent Johnson: That's my point. Look at it now. It went from 400 to 1,000 and now it's back at 400. 

Go look at Volkswagen from 10 years ago. It went all the way up and then it came all the way down. 

There's no line in history that just goes like that and keeps going up. In a short squeeze, you have a tremendous run and then it crashes. 

That same thing is going to happen with the dollar. Everybody thinking that the dollar's going to go to zero, you're absolutely right. 

At some point it will, but you're missing the big run ahead of time.

George: Yeah, yeah, that makes a lot of sense. Now I want to be cognizant of your time here.

Brent Johnson: I've got about 10 more minutes.

The Dollar Devaluation

George: Okay. Last time, we talked about a Plaza Accord 2.0. and kind of being a “solution” if every one of these countries is just getting hammered like Colombia or like Australia. 

I could not believe that, what happened to the Aussie dollar last week. That was shocking even for me and I'm not a professional. 

They come around, they say, “Listen United States. We've got to lower the value internationally of the dollar.” 

I want to find out if you still think that's kind of the end game and if you do how would that work? 

The Fed prints the money and then somehow … I mean it's got to be more than just a swap line, doesn't it? 

How do they inject that into the system outside of the United States in order to create that supply to bring down the price?

Brent Johnson: First of all I don't think there is another way to do it. Unless the Fed is going to start buying Aussie bonds, theoretically they could do that. 

Again, what works in theory doesn't necessarily work in real life. Like, imagine … 

How does Trump go to the American people and say, “Yeah, you're hurting, okay, but that's fine because we're helping the people in Sydney.” 

Whether you like him or hate him, his Make America Greater thing resonates with people who are struggling in the U.S.


Do you think he's arguing for manufacturing through because bringing the dollar down would technically help manufacturing?

Brent Johnson: That could be one of the devil's advocate arguments but ultimately I think … Again, if Trump is negotiating with France, and he wants lower tariffs for our goods going into France or the EU or whatever you want to call it. 

They say no and then he says, “What's your swap line balance with Jay Powell?” They say, “What do you mean? That's independent from the treasury.” 

Trump says, “Yeah, well, let's see about that.” Then Trump goes on TV and he says, “The Fed, against my wishes, is bailing out France. Who we bailed out twice last century and now we're bailing them out again.” 

Do you think that's going to play pretty good to his base? I kind of think it would. 

I don't think that would make Jay Powell a very popular person in Washington or in Philadelphia or in Jackson, Mississippi, or Tucson, Arizona. 

I think that would go over pretty well for Trump if he played that card.

George: Yeah. Yeah. All right, so game theory. It's not just on paper and theory which is what I talk about a lot, but also there is this psychological game theory, political game therapy that you really got to think through as well.

Brent Johnson: Absolutely. Absolutely. Maybe I have it wrong, but I haven't figured out how I'm wrong yet.

George: All right, buddy. Well I sure appreciate your time. 

For anyone that wants to find out more about you or Santiago Capital, where should they go to do that?

Brent Johnson: If anybody's heard of me before, they know I'm pretty active on Twitter at @SantiagoAuFund. 

You can email me, brent@santiagocapital. I'm on your show, I'm on a number of other podcasts. 

You can google amazingly which I think is a little bit ridiculous but it is true that you can google the dollar milkshake theory, stuff will come up. 

My wife thinks it's the most ridiculous thing in the world but it is true.

George: Yeah, you've done a great job of branding. Like you've inadvertently branded that really well.

Brent Johnson: Inadvertently, but yeah, anyway.

George: All right, great conversation. I cannot wait to do it again.

Brent Johnson: Awesome. Any time George.