Wednesday, January 11, 2023

A Country Can't Save Both Its Currency And Its Bonds

I have adopted the position that when a central bank allows its government to overspend and abuse its currency, something has to give. You could say this is one of the unwritten laws of fiat currencies. Time and time again history has proven this to be true and it is the reason many people claim gold is the only true form of money that cannot be corrupted. In a world where everything seems subject to manipulation, this claim about gold is still up for debate. 

The overspending by governments coupled with inflation has really started to affect the perceived value of currencies in relation to other currencies. As these relationships break the losers are the people holding the de-valuated currency. Of course, many factors feed into how we value a currency but the crux of this article is not about whether a currency is over or undervalued but rather what a country must do to defend its value if it comes under attack.

Brent Johnson of Santiago Capital is credited with coining the term the "Dollar Milkshake Theory." It explains how our debt-based monetary system can cause the US Dollar to rise despite the increasing liquidity injections around the world. Whether this was a "grand master plan" or a situation that just developed over time, it is something that may bode well for the dollar. Johnson recently took part in a discussion that included subjects such as the future price of oil, housing, and the probability of a huge global recession. 

About 28 minutes into the discussion which came out in both video and transcript form; Johnson conveys what many of us see as a truth that haunts fiat currencies. This is rooted in the fact that when the value of a currency falls, a country and its central bank cannot save both its currency and its bonds. In his "slightly edited" words;

    "The problem is you cannot, and this is for every country, the US included, again, there’s a progression in how it’ll go, but you cannot save both the bond market and the currency market because they work at cross purposes. Whatever you do to save the bond market hurts the currency. Whatever you do to save the currency hurts the bond market. And every central bank in history has promised they won’t sacrifice the currency, and every central bank in history has ultimately sacrificed the currency.

And the reason they always choose the currency over the bond or the reason they always choose to sacrifice the currency over the bond market is for two reasons. One, the currency affects the citizens more than the government, and the bond market affects the government more than citizens. So they’re going to bail themselves out before they bail the citizens out. And the second thing is if the bond market blows up and the banking system blows up, there is no longer a distribution system for the government to raise money.

So they can’t let the bond market blow up because then they can’t get money anymore. And then if they can’t get money, they can’t operate. So this is a very long way of saying that I understand why the market moved the way it did. I think maybe in the short term it makes sense, but in the medium to long term, it doesn’t make any sense to me at all. Again, kind of watch what they do, not what they say."

He later added "The problem, as we’ve kind of figured out and found out that it’s very hard to just get four for four or 5% inflation. It goes from 2% to 12% pretty quickly. They don’t have as much control as they think they do, right? And the problem with four or 5% inflation, you can kind of get away with it because it’s annoying and it is frustrating, but it’s not totally ruining your life. But with 8, 9, 10, 12, 15, 80% inflation, that starts to ruin the pledge life, as you mentioned. And that’s when they start to push back from a political perspective. And that’s what central banks and governments don’t want. They don’t want the populace revolting

When you think about the true motivators driving this "system," it is logical the government and central banks would throw the populace under the bus. This is about their survival. As to the question of equal pain, those in power justify taking raises to offset the impact of inflation under the idea we "need them" to steer things forward for the "greater good." 

While Johnson's remarks were aimed at what is most apparent in the actions of Japan, this truth is problematic to all fiat currencies. For more on the Dollar Milkshake Theory see;


 (Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)


  1. I have always believed you can get away with about 2-3% inflation/year- it is just under the threshold for what a normal person will notice over the course of time. A normal person isn't going to notice that an item he purchased a year ago cost $10, but now costs $10.30. But he is going to notice that the dozen eggs he bought for $2 last week is now costing $2.10, and then $2.20. Once people start actually noticing it, they start their actions to counter it, and so you go from, as you wrote 2% to 12% almost overnight. It is non-linear.

    1. You're right. The Fed panicked when inflation rose rapidly and the cat was out of the bag that it wasn't "transitory" or under control. Now all of the sudden they're "hawkish".
      The reason they need the 2%(bogus number) constant inflation is because their scheme of endlessly borrowing and printing money needs this to keep the ratio of debt to GDP to stay tame and not rise too much too fast. Plus like you said most people don't get angry about 2-3% price increases. All the absurd Covid spending threw a wrench into their scheme.
      The politicians are too cowardly to actually raise taxes to bring in the revenue they need to keep the bloated govt. going, so they borrow and print which in the end raises prices as much as tax increases would, the hidden tax so to speak.
      Unfortunately, more than half of the people in this country are too dumb to see what's actually been happening for over 20 years now. Many of them just beg for more welfare and subsidies to keep their standard of living the same, and vote accordingly, which in the end will only make things worse.
      This country has been in decline for 20 years, and sadly it will continue unless there's a massive political awakening and change.