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Euro Pacific's Schiff to Moneynews: Fiscal Follies Imperil Dollar

By Forrest Jones and David Nelson   |   Sunday, 02 Dec 2012 03:25 PM

The dollar may be viewed as a safe-haven currency for now, but unless the United States seriously pays down debts and narrows gaping deficits, global investors might soon ditch the greenback and look for investment opportunities elsewhere, said Andrew Schiff, chief marketing officer for Euro Pacific Capital.

Investors worldwide have been stocking up on dollar positions to invest in U.S. Treasury holdings, with the U.S. currency serving as a safe harbor of choice for those looking to cut exposure to Europe.

The dollar has strengthened against the euro and other currencies, while yields on the 10-year Treasury have plunged in the past year.

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However, with a debt exceeding the country’s gross domestic product and a Federal Reserve committed to keeping interest rates near zero to encourage investing and hiring, the dollar will lose its luster very quickly if lasting fiscal and monetary reforms aren’t pushed through right now.

“When your economic plan is built upon the continuing benefit of having the reserve currency, you can only cash that check for so long,” Schiff told  Newsmax TV in an exclusive interview.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

“At some point, the abuse of that status is going to cause your creditors to run from that, so we can’t be complacent only because we are the biggest kid on the block.”

Euro Pacific Capital, meanwhile, is already advising clients to look for alternatives to U.S. dollar-denominated asset classes.

“We are trying to get people to understand that the dollar may be strong now, but it’s not going to be strong forever. We are creating conditions where the dollar has to fall over time, so we are getting our people outside of the dollar,” Schiff said.

“There are some great emerging market stories out there in Asia, in Northern Europe — Latin America is doing just great — so we are trying to get our clients more broadly diversified across the board outside the United States.”

Meanwhile, the world is waiting to see how the White House and Congress work to steer the economy away from the fast-approaching fiscal cliff, a combination of tax hikes and spending cuts due to take effect at the end of this year.

The nonpartisan Congressional Budget Office and private-sector economists have repeatedly warned that failure to address the fiscal cliff could tip the country into a recession next year.

Taxes shouldn’t have to rise, Schiff noted, though they should if it means avoiding the cliff today and opening the door to lasting fiscal reforms in 2013 and beyond.

Government spending, however, must come under the knife.

“I think we have a spending problem not a taxation problem. Taxation is high and is very close to where it has been historically, but the spending is out of whack,” he said.

“I’d love to see a deficit reduction package that is much more heavily favored in terms of spending cuts.”

With Democrats in control of the White House and Senate, the Bush-era tax cuts could likely expire for the wealthy, something President Barack Obama and Democratic allies in Congress have championed.

“You have to bow to the political reality — the Democrats have the votes right now and they probably will maintain those votes for a while, so if it takes some movement on taxes to bide meaningful deficit reductions, I personally would probably be in favor of that. I think you are seeing movement in that direction, but I don’t think we are going to see any real deficit reduction by this Congress,” Schiff explained.

“What you are going to see is some kind of can-kicking deal and all real cuts are now seven or eight years down the road where they can be voted against when the time comes.”

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

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