Money Manager Pento: Dollar Could Lose Reserve Currency Status

Sunday, 09 Dec 2012 06:11 PM

By Forrest Jones and David Nelson

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The U.S. dollar could lose its status as a reserve currency used by countries worldwide for foreign reserves and to conduct commerce if Washington doesn’t make lasting fiscal reforms soon, said Michael Pento, founder of Pento Portfolio Strategies.

Washington needs to push through both short-term and long-term reforms to taxes and spending to keep the greenback attractive.

In the more immediate future, lawmakers and the White House will be scrambling during the coming days to steer the economy away from the year-end fiscal cliff, a combination of tax hikes and deep spending cuts set to kick in at the same time and tip the country into a recession.

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Over the longer term, however, policymakers must pay down debts and narrow deficits if investors are to continue to view the dollar as a reserve currency and asset of choice to ride out uncertainty.

Should debt burdens become unmanageable, investors could lose their appetite for the greenback and avoid U.S. government Treasury bonds, which would send interest rates rising and seriously bruise the economy.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

“The real cliff that we should be concerned about is when our currency loses its world reserve status. We should also be very much concerned about our bond market. There will eventually be a revolt and bond prices will tank and yields will soar,” Pento told Newsmax.TV in an exclusive
interview.

“That is the cliff that I am most concerned about, not this supposed fiscal cliff that everybody wants to rise above.”

Today, the dollar and U.S. Treasury securities remain popular safe-haven investments thanks to the European debt crisis, which continues to drag on with relief here and there coming from temporary measures such as bailouts for countries like Greece.

Investors looking to cut their European exposure have flocked to U.S. government debt despite Standard & Poor’s decision to strip the United States of its coveted triple-A rating in 2011, when lawmakers raised the country’s debt ceiling at the last minute and narrowly avoided default.

Such a trend won’t last forever if Washington doesn’t put politics aside and make lasting fiscal reforms.

Elsewhere, debt concerns in the United States make precious metals a wise investment, gold especially, as the yellow metal tends to trade inversely to the dollar.

“You are going to have a bond market crisis accompanied by a dollar crisis, so if the dollar is losing its value, there is no way you are going to be buying anything else besides precious metals,” he stated.

“You must own precious metals. They have thousands of years of history of maintaining their value during hyperinflation and intractable inflation, and that’s where we are headed eventually if we don’t get our fiscal house in order.”

Stocks in companies that mine gold would make good investments, as well as would cash in the short-term.

Lawmakers will likely steer the economy away from the fiscal cliff either by punting tough decisions down the road or by extending deadlines and using other stopgap measures.

A rally will ensue, even if just for a little while.

“I believe the market will anticipate gradually that we will not resolve the fiscal cliff but just like we did last year with the debate over the debt ceiling, they will eventually punt on the fiscal cliff and raise the debt ceiling,” Pento said.

“And I think there will be a huge bull market in risk assets for about three months.”

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

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