Why is the U.S. dollar a safe haven?
Why do people run to the U.S. dollar amidst a crisis?
Why does the U.S. dollar enjoy global confidence?
Well, there’s not one but many reasons to support this. One of the theories supporting this is the Dollar Milkshake Theory coined by Brent Johnson, Santiago Capital’s CEO, in 2018.
Brent uses a metaphor: a milkshake. According to him, the current economy resembles a milkshake. All the international currencies in the world constitute the milkshake and the economic turbulence is what mixes the ingredients and makes the milkshake.
What is the role of the dollar? The U.S. dollar acts as a straw: it absorbs the liquidity to stop the turbulence.
What exactly is the Dollar Milkshake Theory?
According to the Dollar Milkshake Theory, global central banks created a huge pool of money – the milkshake -through massive monetary easing. Now, as the U.S. Federal Reserve shifts from making things easy to tightening policies, it’s like using a big straw to suck up that money from global markets. This makes the U.S. dollar stronger compared to other currencies.
The tricky part is that many countries owe money in dollars. As the dollar gets stronger, it becomes more expensive for them to repay those debts.
The theory is rooted in two key ideas:
- the world’s reliance on the U.S. dollar for pricing and
- the perpetual cycle of long-term debt.
How does the Dollar Milkshake Theory work according to Brent Johnson?
World countries engage in trade and loans.
Now, imagine the main character in this tale as the U.S. dollar. Despite a few countries trying to play big roles, the dollar remains the king in the world of trade and investments.
According to the Dollar Milkshake Theory, the demand for U.S. dollars is like a giant wave, way more than what’s available. This demand and supply mismatch causes the dollar to become stronger and stronger.
Many countries are swimming in debts, all in dollars. They’ve borrowed a huge amount of money, and now they need to pay it back with interest, all in dollars. This creates an even bigger demand for dollars.
The U.S. dollar’s strength is further fortified. If there’s a huge problem with countries not being able to repay their debts (let’s call it a sovereign debt crisis), the dollar’s value shoots up way higher than other currencies.
Now, as the dollar rises, everyone around the world wants to be friends with it. They trust the U.S. financial system because it has a history of stability. So, when there’s trouble in other countries, people rush towards the dollar for safety.
This rush of people and money makes the U.S. markets feel like the hottest party in town, but the rest of the world’s markets are left feeling a bit empty. It’s like everyone wants to be in the USA, and the other countries are left with a bit of a party hangover.
The question arises: can the dollar maintain its position as the strongest currency? Well, if we look back at history, it seems like the dollar has a track record of doing just that.
For instance, even the Chinese yuan, which held its ground impressively against the dollar until March 2022, eventually bowed down to the dominance of the greenback. In the past 18 months alone, the Chinese yuan has experienced a remarkable depreciation of 15% in comparison to the mighty dollar.
How does this impact U.S. real estate and investments?
If the dollar milkshake theory plays out, it will aid the U.S. real estate investments positively:
A stronger U.S. dollar is poised to attract heightened foreign investment, transforming the country into an even more appealing destination for global investors seeking stability and secure returns. This will in turn create the potential to stimulate demand, fostering market growth and contributing to increased property values.
If the dollar milkshake theory plays out, it will aid the U.S. real estate investments positively:
A stronger U.S. dollar is poised to attract heightened foreign investment, transforming the country into an even more appealing destination for global investors seeking stability and secure returns. This will in turn create the potential to stimulate demand, fostering market growth and contributing to increased property values.
Moreover, the theory’s emphasis on the U.S. dollar as a safe haven during times of global economic uncertainty adds an extra layer of appeal to U.S. assets, particularly real estate. This heightened confidence is likely to trigger asset appreciation, bringing benefits to existing property owners and enticing new investors into the market. Ultimately, the positive market sentiment surrounding U.S. real estate paints a promising picture for those considering investments in the dynamic landscape shaped by the evolving dynamics of the U.S. dollar.
As the global economic stage continues to evolve, the spotlight on the U.S. dollar and its impact on real estate remains undeniably bright. Seize the moment, explore the possibilities, and consider making the U.S. dollar a cornerstone of your investment portfolio.
Wondering how to get started? Reach out to us and our team of experts will help you.
About Ashton Gray Investments
Ashton Gray is a vertically integrated real estate investment and development company that has created a competitive advantage that yields higher returns for its investors. With its proven 100% return on capital track record, Ashton Gray is a leader in the private equity real estate arena.
