The pieces of the puzzle are starting to come together. The...

The pieces of the puzzle are starting to come together.

The chart below is a monthly chart of USDCNH (dollar/yuan exchange rate).

China launched its yuan denominated oil futures on March 26.

That was the EXACT BOTTOM of the dollar/yuan exchange rate. Since then the dollar has been going up against the yuan.

Is this just a coincidence?



This may not prove the dollar-yuan-oil relationship, but I think it's some pretty compelling evidence.

Remember, too, under the "petrodollar" the U.S. dollar has been gradually declining for over 40 years.



But why would the dollar decline? That's what some of you are asking.

Here is my answer. I could be wrong and that could be the fatal flaw in my argument, but here is what I think.

It will take time for the dollar to go up. It will take the US running a trade surplus for some years to "absorb" a lot of the global dollar supply. In the meantime it will be one country off-loading dollars to another country, etc. That will drive the exchange rate down to a point where US exports become competitive and the ability to produce here and sustain an export economy is sufficiently developed.

Furthermore, it is not certain that the spare capacity that currently exists in the U.S. is up to the standards of world production. After all, as a nation they have been investing heavily abroad for the last 3 decades. Their infrastructure alone is not on par with the rest of the world. So there's that. It would suggest a period of relatively high inflation ahead.