TLDR Debasement trade isn't a guaranteed outcome despite abundant liquidity and rising asset prices, and the dollar milkshake thesis oversimplifies reality. Asset gains and liquidity tempt holding gold, silver, Bitcoin, stocks, and real estate, but simply printing more money or chasing hard assets won't deliver guaranteed fortunes. In a debt-based system, money must circulate through new loans; reserves plug holes but don't automatically expand the money supply. The yen carry trade and Bank of Japan policy add risk: a sharp move in the yen or a liquidity squeeze could trigger volatility and unwind leverage. Humility matters: forecasts can fail, so reassessment and diversification—gold included—are prudent. Bottom line: don't chase easy fixes; monitor liquidity, circulation, and policy signals and be prepared for drawdowns.
Understand how money circulates in a debt-based system
Understanding how money circulates in a debt based monetary system helps ground expectations. In this framework, money is created when banks issue new loans and reserves sit at the central bank. Not all reserves become circulating money, and the pace of lending matters more than the amount of reserves alone. When liquidity improves but lending remains weak, the system can still contract. This means the debasement trade is not guaranteed to produce lasting gains and requires careful analysis of liquidity and credit dynamics.
Distinguish new dollar supply from circulating money
Distinguish new dollar supply from circulating money. The money that actually moves through the economy is created through lending backed by reserves. Reserves sit as collateral at the central bank, but they do not automatically raise the total money supply. If the hole in liquidity grows faster than new reserves, the system can still stagnate. Monitoring the private sector response and the rate of new lending helps assess the real risk of a liquidity crunch.
Monitor liquidity signals and the lending response rather than prices alone
Monitor liquidity signals and the response of markets rather than relying on price moves alone. Liquidity can remain high even as fundamentals weaken, and asset prices can rise on expectations of policy support. The debasement narrative gains momentum when liquidity is abundant across stocks and commodities, but this does not guarantee a sustained trend. Track how much lending is actually happening and watch central bank signals about reserves and credit conditions.
Diversify with monetary metals and understand the yield profile
Diversify with monetary metals and understand the return profile. Owning gold remains a common stance in the debasement thesis. There are multiple ways to own gold and some options allow you to earn a yield while holding physical metal. Monetary metals strategies can improve a portfolio Sharpe ratio, though they carry risk and are not risk free. This approach offers diversification beyond simply stacking gold and can adapt to changing liquidity conditions.
Be aware of currency carry trades and how yen and dollar dynamics shape liquidity
Be aware of currency carry trades and how yen and dollar dynamics shape liquidity. The yen and the US dollar act as key funding currencies in global markets, and flows in these currencies influence asset prices and volatility. Bank of Japan policy shifts have driven yen weakness and can alter carry trade profitability. A rising yen could unwind carry positions and trigger rapid liquidity change. Understanding these dynamics helps you avoid surprise drawdowns in a debasement driven environment.
Prepare for potential volatility and credit contractions
Prepare for potential volatility and credit contractions. A credible scenario includes a credit contraction even within an inflationary context. If liquidity withdrawal coincides with adverse shocks, volatility can spike as the VIX rises and the dollar strengthens. A quick deterioration in market breadth can squeeze asset prices and threaten previous bets. This possibility argues for robust risk management and scenario planning.
Maintain humility and reevaluate beliefs as markets evolve
Maintain humility and reevaluate beliefs as markets evolve. Even based on strong signals, forecasts have failed in the past, as shown by energy price moves after geopolitical events. Always test your assumptions against new data and adjust allocations accordingly. Use a structured process to weigh different signals and avoid overconfidence in any single narrative.
What is the debasement trade and how does it relate to the dollar milkshake theory?
The debasement trade is the idea that fiat currencies will lose value over time; within the dollar milkshake theory, abundant liquidity and Fed actions can boost asset prices, but this narrative is not guaranteed and can oversimplify reality.
Why is the debasement thesis not guaranteed to work?
Because it oversimplifies reality, and even with liquidity and money printing, the outcome depends on how money circulates and how the private sector responds; injections alone don’t guarantee higher prices.
Why might buying hard assets be appealing, and what are the caveats?
Moving out of fiat into assets like gold, silver, Bitcoin, stocks, or real estate makes sense in principle since fiat loses value, but the path ahead is complex and not guaranteed; staying flexible and reassessing beliefs is essential.
How does money circulate in a debt-based monetary system and why do reserves matter?
Money must circulate through transactions and new loans; if circulation stops, the Fed injects reserves to plug the hole; money actually circulating is the money loaned into existence, which carries interest, so the system relies on ongoing lending and circulation.
What is the relationship between liquidity, reserves, and asset prices?
Reserves sit at the Fed and back lending; the Fed signals ample reserves to support more lending, but unless the private market uses those reserves to create new money, total money supply doesn’t automatically rise; liquidity supports asset prices but is not a guarantee of higher money supply.
What roles do the yen and the U.S. dollar play in global liquidity and carry trades?
The yen and the dollar are the world’s largest carry trades; weakness in both keeps liquidity abundant and asset prices high, while changes can trigger volatility via the carry trade dynamics and VIX/DXY correlations.
What are the risks associated with BOJ policy and the yen carry trade?
BOJ policy shifts have driven yen depreciation; higher rates can strengthen the yen, which could unwind the carry trade and spark liquidity problems, potentially pushing the VIX higher and the dollar higher in a risk-off scenario.
What guidance do analysts offer beyond chasing grand predictions?
Focus on understanding the dynamics behind headlines about the yen carry trade, recognize that outcomes can be volatile, and prepare for possible drawdowns; a quiet yen path might be benign, but big moves can drive substantial volatility.
What did Santiago Capital say about the yen carry trade and market risks?
Santiago Capital stresses understanding the dynamics behind headlines rather than predicting exact moves, notes that the yen’s path could cause problems regardless of direction, and warns that large moves could drive volatility in 2026; their research is available on their site.
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