No Reverse Gear

No reverse gear theory explains why debts and deficits will keep expanding. Alternatively, the system implodes.

A monetary debt system constantly needs new currency to meet the service repayments on debts, and it is a system with no reverse gear, according to Brent Johnson, author of the Dollar Milkshake Theory. 

Explaining the no reverse gear theory in the context of the system

So, the total currency in a system consists of cash deposits at banks, notes and coins people hold leveraged multiple times.

The system needs new money to pay the interest on loans. So where is the money coming from?

Johnson explains money can change hands fast enough, known as money velocity so that one dollar can pay more than one dollar in interest. Alternatively, someone has to pump the system with currency or increase the amount of collateral to keep the system in balance.  

When loans are issued, the bank creates currency, and if the loans are circulating fast enough in the economy, in other words, money velocity is fast enough to service interest payments on the loans, everything is fine.  

Why no reverse gear, and what is the problem?   

No reverse gear

Darren Winters explains, the problem with reverse gear is that currency stops flowing, which means a shortage of currency to service interest payments on debts.

So when central banks attempt to put the system into reverse, loan defaults skyrocket, credit contagion and a recession, economic contraction, and an inevitable crash follow.

“For our economy to continue to function, it has to grow. There is no reverse gear,” explained Johnson.    

Could the no reverse gear theory explaining the need for more collateral lead to resource wars?

The velocity of money collapsed over the past few decades as the middle class dwindled. Moreover, the public deficits of most of the G7 advanced economies continue to expand at what many believe to be unsustainable levels. But during this period, a decade of resource wars followed.    

In 1972, Nixon cut the gold convertibility to the dollar, which meant that countries that traded with the US and earned dollars could no longer convert their dollars into gold. A temporary run on the dollar was cleverly averted by backing the dollar with Saudi oil, known as the Petrodollar oil deal. The Middle East was a rough neighbourhood, so the US offered the Saudis security in exchange for pricing oil in dollars. The petrodollar deal increased global demand for dollars and saved the currency from a collapse and hyperinflation.   

So, if the 1970s petrodollar deal with the Saudis saved the dollar from collapsing, could a similar US-Russian gas deal save a 2020s dollar currency crisis and prevent war in Europe from escalating to a nuclear level?

In a piece entitled “Rethinking Foreign Policy,” dated February 2023, referring to the Nord Stream pipeline line attack, it was written, “Now we have commodity-rich Russia and energy-hungry Europe with a broken gas pipeline.”  

How can increasing the money supply to finance a multi-billion dollar war in Ukraine, which has escalated the Defcon level to 3, benefit the dollar, the Fed’s private banking cartel shareholders, or the populace?

Germany and Russia fought the bloodiest wars last century. Yet despite this bad blood, both worked towards peace, found comparative trade advantages and mutually prospered along with the continent. 

A mutually beneficial relationship between the superpowers is better than the alternative.  

No reverse theory explains the need for central banks to keep creating currencies. But where is the logic in going further into debt, increasing the money supply to back a war that nobody wins?   

No reverse theory ends in a dollar melt up and then a currency collapse

Johnson takes a contrarian view, believing that the dollar will strengthen in the early stage of the crash regardless of the Fed’s pivot in 2024.

Indeed, since 2008, despite trillions of dollars of unprecedented Fed liquidity, the DXY Dollar Index has risen 20% against a basket of currencies. 

Central banks are the metaphoric giant milkshake, pouring liquidity into the system, and the USD, with its large straw sucking up global liquidity.

Treasury bills at current yields have a global appeal, particularly in a backdrop of war on almost every continent and global recession fear. 

The US public deficit of 34 trillion dollars, growing yearly by a few trillion dollars is problematic. But it is not uniquely a US problem. 

The size of the US economy and USD reserve currency status puts the US in a stronger advantageous position to deal with a pending debt crisis than the rest of the world.  

Darren Winters explains, the worse the global economy and escalating wars, the greater the central bank liquidity and the higher the dollar, and dollar-denominated assets could go.     

No reverse gear, controlled demolition of the system 

The Fed is mindful that a crash will hurt the US and the rest of the world.

He points out that the monetary system is global, so all central banks will have the same issue of needing to print because there is no reverse gear. 

When the situation becomes messy, they will all provide banks with more liquidity and banking bailouts to get the system circulating again.  

Globally currencies will depreciate against assets, but US dollars will depreciate less. That is how the US, on a relative basis, will outperform the rest of the world.   

No reverse gear, controlled demolition leads to a Game of Thrones 

Countries are fighting for their own survival and potentially escalating conflict between countries. 

There is no reverse gear, and central banks will have to circulate more money 

When countries end up in this situation, they will either save the bond market or the currency. 

The dollar has not debased like most other currencies because he believes a global drain is taking excess liquidity away. 

The rest of the world needs dollars because it is a reserve currency. Other currencies don’t have this advantage. The Fed is printing for the whole world. 

He sees a debt crisis coming and believes the rest of the world will have to do the same thing and save their bond market at the cost of putting stress on their currencies. The US dollar is the last currency to blow up.  

He believes the unintended consequences will not be good and advocates gold and stocks, diversified investments and keeps an open mind.  

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