A most abhorrent institution

The Federal Reserve is a most abhorrent institution. Its habitual money printing and interest rate repression serves to enrich banks just as it bankrupts the middle class.

Want proof? Underneath the thin veil of consumer prosperity lies a pile of festering rot. The bottom 80% of consumers are suffering greatly from inflation, while the top fifth of wage earners are basking in prosperity. U.S. consumer loan delinquency rates are now at the highest in nearly a decade. These loans include such things as mortgages, student debt, and credit cards. In fact, C.C. payments that are at least 90 days past due have risen to 12.7%--the highest since 2011. If the U.S. economy were really working for most people, then we would not have delinquencies and defaults spiking across the entire array of consumer debt. Approximately 1.1 million U.S. homeowners were underwater on their mortgages at the end of 2025. That is the highest level in 7 years and an increase of over 60% from last year. These homeowners are now highly incentivized to sell.

Additionally, there are another 3.2 million borrowers who have less than 10% equity in their homes. A drop of just 10% in home prices nationwide would leave 4.3 million homeowners with zero equity and very motivated to default on their loans and rent instead of paying the mortgage, taxes, insurance, and maintenance. And why not rent instead of owning? Renting is significantly cheaper than buying a home, with average monthly mortgage payments roughly 21% to 38% higher than rent payments in most U.S. markets.

The real estate transaction market remains mostly frozen, and home prices are poised to correct sharply. According to the National Association of Realtors, January existing home sales were at a seasonally adjusted annual rate of 3.91 million units, falling short of the projected 4.16 million. Existing home sales sank 8.4% last month from December. And no, it wasn’t because our December was colder than normal. Home sales slowed sharply across the Northeast, Midwest, South, and West. But sales had their biggest annual and monthly drop in the West, which wasn’t affected negatively by the cold weather in the East. Meanwhile, home buyer interest is down 40% from pre-pandemic levels.

To be clear: the weakness in the middle class is causing delinquencies and defaults to increase on consumer debt, and their tenuous employment status, coupled with the fall of incomes vs. home prices, has turned the dream of home ownership into a nightmare.

Many mainstream economists preach that the Fed’s money printing can monetize the debt problems away. That is smoke and mirror economics. If that were even remotely true, the U.S. government would not be teetering on insolvency. The Congressional Budget Office just increased its 10-year (2026–2035) cumulative deficit projection by $1.4 trillion to $23.1 trillion. The 10-year deficit outlook is $1.4 trillion higher than the January 2025 projection. Deficits are expected to rise from $1.9 trillion in 2026 to $3.1 trillion by 2036. These massive and untenable deficit and debt projections ridiculously assume that interest rates will remain low and that there will not be a recession in the next decade, which would be by far the longest period in U.S. history in which the economy did not experience a contraction. Hence, the already daunting and horrific deficit projection numbers are merely the rosiest of outcomes that could materialize. A more realistic estimate puts annual deficits between $4-$6 trillion during a recession and total debt to increase by $30 trillion in the next decade. Putting the total well over $60 trillion!

But have our central bank and government learned their lesson? Sadly, they have learned nothing. Maybe it is because the Fed feels it has no choice. I mean, what other reason could there be for the Fed to even consider lowering interest rates and loosening monetary policy when it has been unable to bring inflation down to its 2% target for the past 5 years? To this point, the Fed printed another $21 billion out of nothing just last week to try to keep the repo market from collapsing. This game will continue until inflation stops them, because you cannot fix an inflation problem by printing trillions of new credit and dollars. Assuredly, there will be a time when monetizing debt no longer covers up the problem; it will just make the dollar & bond markets tank, while inflation rates run intractably high. In the meantime, the Fed is compelled to keep the bubble afloat, and that is exactly what Mr. Powell is doing. The hope is that Kevin Warsh will be different and put Main Street ahead of Wall Street, but that has yet to be proved.

The two salient risks for this year are as follows: the massive misallocation of capital for overinvestment in AI chips and data centers comes to a halt due to a lack of ROI and the inability to service the debt. The other risk is a crisis in the money markets, caused by the new Chair, Kevin Warsh, pledging to shrink the Fed’s balance sheet. Are one or both outcomes guaranteed to occur this year? No. But you better have a money manager on high alert for it to happen, because when the stock market is the most overvalued in history and needs to correct by over 50% just to get back in line with historical metrics, being a buy-and-hold bag holder of equities is an existential crisis.