The Dollar Milkshake Theory, a growing topic of debate on YouTube, Reddit, and other social platforms, claims to offer a framework for explaining the US dollar’s strength in an era of expanding liquidity. It posits that global liquidity injections — largely a product of excessive monetary easing by central banks — are ultimately siphoned into US assets, strengthening the dollar and exerting deflationary pressure on weaker currencies. 

While there are elements of truth to this framework, the theory is fundamentally flawed. It assumes that distortions caused by state intervention are not just inevitable but permanent, and it ignores the long-term economic consequences of financialization generated by artificial credit expansion. Moreover, it misreads the actual trajectory of global monetary dynamics, particularly as dedollarization gains traction in response to America’s fiscal mismanagement and weaponization of its currency.

Artificial Liquidity and Malinvestment

At its heart, the Dollar Milkshake Theory relies on the notion that the Federal Reserve’s policies will always create an economic environment where capital is drawn disproportionately to US  assets. Even if this is the case, it is not a feature of the markets or superiority, but a function of expansionary monetary policy distortions. A constant supply of artificially cheap credit and market interventions have created a global economic order in which capital is allocated not based on productivity, innovation, or comparative advantage, but instead on the relative ease of financial arbitrage within a system dominated by the Fed and other major central banks.

It’s an arrangement that leads to severe malinvestment, where capital flows not to where it is most efficient, but rather to where it is temporarily most attractive due to manipulated interest rates and financial repression. Instead of productive investment in industries that drive organic economic growth, we see speculative bubbles: artificial intelligence stocks, real estate, US Treasuries, Pokemon cards, non-fungible tokens, and beyond. The problem is not only that bubbles shunt investment away from more deserving areas, but that they are not sustainable in the long run — the moment the Fed reverses its expansionary policies, or the global financial system starts restructuring, these flows will dry up, leading to painful unwinding of the imbalances.

The Fragility of Dollar Hegemony

Another core weakness in the Dollar Milkshake Theory is its assumption that the dollar will remain permanently dominant because global institutions and sovereign entities have no alternative. This is a mistake. Markets, when allowed to function properly, do not tolerate monopolies indefinitely. Just as inefficient businesses lose market share to more competitive firms, inefficient financial structures give way to more viable alternatives. The current trajectory of global trade and finance suggests that dedollarization is not just theoretical — it has begun.

China, Russia, and a growing coalition of emerging markets have been actively reducing their dependence on the US dollar in trade settlements. The rise of currency swaps, central bank digital currencies (CBDCs), and alternative trading mechanisms (such as BRICS’ push for a commodity-backed reserve currency) all suggest that the dollar’s hegemony is not guaranteed. Additionally, the US government’s willingness to use the dollar as a tool of financial coercion — sanctions, asset freezes, and trade restrictions — has accelerated global efforts to diversify reserves away from the greenback. While the milkshake theory assumes that dollar dominance is reinforced through financial gravity, other spheres have their own gravity, which is pulling toward alternatives.

Monetary Competition

A better solution is not an unchallenged dollar absorbing global liquidity, but a monetary system where currencies compete freely. The current dollar-dominant system is not the result of market forces but of decades of government privilege—Bretton Woods (1944), the informal but consequential petrodollar agreement, and decades of Federal Reserve intervention. (If President Trump has his way, sanctions against nations using anything but the dollar may soon be in place.) In a truly free market, money would emerge naturally through competition, and its value would be determined by its qualities as a medium of exchange, a store of value, and a unit of account — not through financial engineering and central bank intervention.

Gold, Bitcoin, and commodity-backed currencies are potential competitors to the dollar that have been suppressed or marginalized by policy-driven mechanisms. While the Dollar Milkshake Theory acknowledges the capital-absorbing nature of the dollar, it fails to recognize that this phenomenon is itself a symptom of financial repression, rather than market efficiency. A free market would correct these distortions by allowing alternative currencies to emerge and compete without state-imposed barriers.

To its credit, the Dollar Milkshake Theory correctly observes that the short-term appeal of US  assets is frequently a product of the conditions set by global monetary easing. That fails, however, as a long-term economic model. Distortions created by government intervention are sticky and lead to instability and correction. More critically, it ignores the growing move toward dollar alternatives, an inevitable consequence of free-market forces working against rigging and coercion. 

Economic freedom is not defined by an endlessly dominant dollar, but rather a world wherein monetary competition is allowed — indeed, encouraged — to flourish. The global economy is already moving in that direction, and the longer investors and policymakers rely on the outdated assumptions of dollar hegemony, the more painful the transition will ultimately be. Half-baked theories will only compound the eventual cost.

The French Enlightenment is often referred to as the Age of Reason. This period produced some of humanity’s greatest natural scientists, including Antoine Lavoisier, the pioneer of modern chemistry; Joseph-Louis Lagrange, whose contributions to number theory are well known, particularly in economics; and Pierre-Simon Laplace, a foundational figure in probability theory. But as Friedrich Hayek pointed out, “modern socialism and that species of modern positivism, which we prefer to call scientism, spring directly from this body of professional scientists and engineers which grew up in Paris.”

While Paris significantly contributed to the natural sciences, laying the foundations for many discoveries that improved human life, it also gave rise to modern socialism and scientism. How did this paradox emerge? To answer this question, we must examine one institution: the École Polytechnique.

L’École Polytechnique

Hayek, in The Counter-Revolution of Science, referred to the École Polytechnique as “The Source of the Scientistic Hubris.” Founded in 1794 during the French Revolution and later favored by Napoleon for training engineers and military personnel, this institution was a product of revolutionary ideals. The intellectuals of that time believed that education should focus exclusively on the sciences, relegating humanities, religion, Latin, and literature to an inferior status. These subjects were seen as outdated and unworthy of serious academic attention. This mindset is encapsulated in the writings of Henri de Saint-Simon, who observed: “In those not distant days, if one wanted to know whether a person had received a distinguished education, one asked: ‘Does he know his Greek and Latin authors well?’ Today one asks: ‘Is he good at mathematics?’”

The École Polytechnique trained some of the nineteenth century’s greatest mathematical and scientific minds, such as Siméon Denis Poisson (known for the Poisson distribution), Benoît Clapeyron (famous for the Clapeyron equation), and Joseph Liouville (recognized for Liouville’s theorem). Even Bernard Arnault, one of the wealthiest individuals of his day, studied at this institution. As Hayek keenly observed, however, problems arose when these highly skilled technical specialists ventured into the realm of the social sciences.

The Council of Engineers of the Human Soul

The story begins with the entry of these technical minds into the social sciences. They sought to understand human society using the same methods applied to the natural sciences. If the scientific method had successfully explained the physical world, why not apply it to human society? What could possibly go wrong?

This is where Henri de Saint-Simon emerges as a key figure. A man who first accumulated wealth through banking and financial speculation, Saint-Simon later turned his attention to the sciences in 1798, using his fortune to acquire scientific knowledge. He developed close relationships with the students and professors of the École Polytechnique, driven by a strong belief in “pure science” — not only for understanding the natural world but also for organizing society. His journey to Geneva proved significant in this respect, as he proposed a radical project known as the Council of Newton.

This council, which reads like a plot from a science fiction novel, was to be composed of twenty-one members: three physicists, three chemists, three mathematicians, three physiologists, three litterateurs, three painters, and three musicians. The entire human race would vote for the members, and the mathematician who received the most votes would serve as the council’s president. This body would act as the representative of God on earth, effectively replacing the Pope. Saint-Simon envisioned this supreme council directing all human labor, and he suggested that anyone who disobeyed its directives should be treated as a quadruped. This concept of central planners engineering society according to their superior knowledge laid the foundation for communism, which later took its horrific historical shape.

This vision represented a new form of religion, as Lord Acton famously remarked: “The age preferred the reign of intellect to the reign of liberty.” The Saint-Simonian view of science was one without limitations — where the same methodology should be applied regardless of whether one was studying a simple physical phenomenon or a complex social system. The ultimate goal of the social sciences, in their view, was not to describe society, but to control and predict it. As Saint-Simon put it, “We must examine and coordinate it all from the point of view of Physicism.” This dangerous illusion was later echoed by Stalin, who saw writers as “engineers of human souls.”

The Problem of a Free Society

It is crucial to recognize that the problems faced by a free society are not technical in nature. They cannot be solved by technical experts armed with sufficient knowledge and data. Social phenomena involve variables that interact in complex and unpredictable ways. Unlike the physical sciences, where a few key variables often determine outcomes, the social sciences deal with dispersed knowledge that no single individual or group can fully comprehend. There are no constants or stationary relationships — only patterns.

Because of these limitations, what we need is what Frank Knight — described by Hayek as “the most distinguished living economist-philosopher” — termed “governance by discussion.” Political and economic institutions should be designed to harness decentralized knowledge, allowing individuals to contribute their own unique bits of information. A free society is one of constant discovery, adaptation, and knowledge acquisition. Hayek summarized the role of social science as follows: “The characteristic problems of the social sciences seem to me to arise out of the fact that neither acting man nor the social scientist can ever know all the facts which determine human action, and that the problem of the social sciences is essentially how man copes with this essential ignorance.”

The Importance and Limits of the Social Sciences

The scientistic hubris of the engineers from the École Polytechnique serves as a reminder of both the importance and the limitations of the social sciences. The technicians who believed society’s problems could be engineered away ignored a fundamental insight from the Scottish Enlightenment thinkers: institutions are products of human action, not human design. Hayek cautioned against the narrow technical specialist, who “was regarded as educated because he had passed through difficult schools but who had little or no knowledge of society, its life, growth, problems, and its values, which only the study of history, literature, and languages can give.”

As Hayek warned, social science is not merely about technical expertise but about understanding the complex interplay of social forces, and an acknowledgement of diverse human values and experiences.