Dallas Fed President Warns: US Debt Situation At “Tipping Point”

The latest comments from Dallas Federal Reserve President Richard Fisher at the House of Finance in Frankfurt, Germany would have been considered blogosphere doom & gloom and fear mongering just a couple of years ago:

The U.S. debt situation is at a “tipping point,” Dallas Federal Reserve Bank President Richard Fisher said on Tuesday, and urged the U.S. central bank to refrain from any further stimulus measures.

“If we continue down on the path on which the fiscal authorities put us, we will become insolvent. The question is when,” Fisher said in a speech at the University of Frankfurt.

Fisher, seen by economists as one of the most hawkish policymakers within the Fed, said that although debt-cutting measures would be painful, he expected the U.S. to take the necessary actions.

“The short-term negotiations are very important. I look at this as a tipping point.”

He said the U.S. economy was now growing under its own steam, but voiced his concerns about building global inflation pressures and said it was now time for the central bank to stop pumping out extra support.

“The Fed has done enough, if not too much, and we should do no more.. In my opinion no further accommodation is necessary after June either by tapering off the bottom of treasuries or by adding another tranche of purchases outright.”

…

“The real question is when do we stop accommodation.”

“We need to continue to discuss the exit policy… but before you can tighten you have to stop accommodating,” he said.

The problem, of course, is that path on which our fiscal authorities have put us will not change. While we hear talk of spending cuts, they are but a drop in the bucket compared to what really needs to happen. While pundits would describe recent spending cuts of $6 Billion from the federal budget as unprecedented and a step in the right direction , in the grand scheme of things, they mean absolutely nothing considering our 2011 deficit will likely exceed $1.5 trillion and our overall national debt and commitments over the next 25 years are some $200 trillion. The Fed, as Mr. Fisher points out, is accommodating the US government spenders by purchasing around $75 billion a month, that we know of, in US Treasury debt.

Insolvency will become a mainstream media keyword, as first we’ll see local and state governments go bankrupt, and then, the US Federal Government itself. The other option, and in our view the most likely outcome, is that the US will not default on it’s debt, but this will only be possible with more monetary expansion, leading to more inflation and the real possibility of hyperinflation.

While Mr. Fisher argues that the economy is running under its own steam, we must humbly disagree. Any removal of Fed stimulus and liquidity will cause the house of cards to come falling down, and we simply don’t see a change in Fed or US government policy anytime soon.

There really is no easy way out of this. It’s going to hurt, one way or the other.

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Union Of Concerned Scientists Releases Report On US Nuclear Plant Safety, Finds NRC Oversight Weakness At Indian Point NPP

From a just released report by the Union of Concerned Scientists, focusing on US Nuclear Power Plant oversight by the Nuclear Regulatory Commission. “Many of the serious safety or security lapses at U.S. nuclear power plants in 2010 happened because plant owners — and often the Nuclear Regulatory Commission (NRC) — failed to address known safety problems.” And something potentially concerning to Buchanan, NY residents where Indian Point NPP is located: “the NRC did not always serve the public well in 2010. This report analyzes serious safety problems at Peach Bottom, Indian Point, and Vermont Yankee that the NRC overlooked or dismissed. At Indian Point, for example, the NRC discovered that the liner of a refueling cavity at Unit 2 has been leaking since at least 1993. By allowing this reactor to continue operating with equipment that cannot perform its only safety function, the NRC is putting people living around Indian Point at elevated and undue risk.” The report’s conclusion: “when the NRC tolerates unresolved safety problems — as it did last year at Peach Bottom, Indian Point, and Vermont Yankee — this lax oversight allows that risk to rise. The more owners sweep safety problems under the rug and the longer safety problems remain uncorrected, the higher the risk climbs.”

Indian Point section from the report:

The Indian Point nuclear plant in New York features two pressurized water reactors (PWRs). To refuel a PWR, workers flood the refueling cavity with water, which allows them to remove irradiated fuel assemblies from the reactor core and replace them with fresh fuel assemblies. The water both removes decay heat from the irradiated fuel assemblies and shields the radiation they emit, protecting the workers.

The Final Safety Analysis Reports (FSARs) submitted by the plant owner with the application for an operating license for Unit 2 stated that the refueling cavity was “designed to withstand the anticipated earthquake loadings,” and that “the liner prevents leakage in the event the reinforced concrete develops cracks.” When the NRC issued the operating license for Unit 2, the leakage prevention function of the liner for the refueling cavity became part of the licensing basis. However, NRC inspectors at Indian Point recently found that the liner has been leaking 2 to 20 gallons per minute since at least 1993 (NRC 2010v), and that the plant owner has not yet delivered on repeated promises to fix the leak. That means the device installed to prevent leakage after an earthquake is leaking before an earthquake even occurs. The liner has no other safety function. Yet NRC managers have dismissed the longstanding problem, noting that the refueling cavity leaks only when it is filled with water (NRC 2010o).

[more...]

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Dollar Turning Point?

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A Financial Armageddon subscriber recently asked me (in a nice way) if I was too negative in my economic outlook, and if I "was capable of a semi-bullish statement of any sort."

I responded that there is always the risk I am wrong in my views. Indeed, I added, when I first began to contemplate the prospect of an economic meltdown (when most economists were expecting the "Goldilocks economy" to continue for the foreseeable future), I underestimated the degree to which authorities would pull out all fiscal and monetary stops to try and keep the leaking ship afloat.

But in the end, I said, nothing has changed. The factors and circumstances that led me to write Financial Armageddon in the first place (e.g., extraordinarily high debt levels) are still there, and in some cases things are much worse than they were four years ago.

But as to my correspondent's second point, I have been known to be bullish on occasion. Those who have been following my work since the crisis began will recall that I was predicting a stock market rebound in March 2009 (I am on the record in several places). Admittedly, I did not anticipate a two-year, 100% rise. Nevertheless, I've learned the hard way that when most investors are on the same side, even if it makes sense longer term, Mr. Market usually finds a way of proving them wrong, at least temporarily.

With that in mind, I wrote a post last week, "Now Is Not the Time," in which I argued that it was risky to be betting on further dollar weakness right now because sentiment towards the currency had become so lopsidedly bearish. As proof, I cited nine recent articles from a variety of business news outlets that made it clear the bulls were few and far between. Other reports since then have noted that speculators have been shorting the greenback with relative abandon.

Today, however, I came across what may well be the best evidence yet that a moment of contrarian reckoning -- that is, a dollar rally -- is at hand. I refer you to the cover story, "The Money Whirl," in this week's Barron's.

 

As was the (in)famous August 1979 BusinessWeek issue proclaiming "The Death of Equities," which preceded the greatest bull market in history, or the June 2005 Time magazine cover story, "Home $weet Home," which marked the peak of history's biggest housing bubble, when mainstream publications feature boldly assertive reports about popular and long-running investment themes that is often a bell-ringing moment, signaling that circumstances are set to change -- perhaps dramatically.

Is history about to repeat itself?

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