Treasury bill rates are barely above zero. This means that interest on the nearly $ 11 trillion dollars worth of funded debt are miniscule. Most states and local governments face low interest rates on funding as well. What happens when this changes?
Imagine that rates increase by a mere two percent on US treasuries, which would put such rates closer to their historical averages. Two percent of $ 11 trillion is $ 220 billion per year. Compare that to what Obama expects to receive from "taxing the rich" -- $ 80 billion per year.
But once rates start up, there is no reason for them to rise by a mere two percent. Rates have been as high as high double digits in the past -- try the early 1980s, for example. Lets suppose, to keep things simple, that once inflation takes hold, rates level off at ten percentage points higher than current rates. That would $ 1.1 trillion to annual spending. How does that compare to taxing the rich.
Add in the spiraling debt of state and local government and tack on much higher rates for those entities and you will reach spending levels that no tax rates can hope to catch.
All of this is before you try to fund the unfundable -- social security and medical care.
Don't imagine that the Federal Reserve can help. Bernanke isn't keeping rates low. Markets are keeping rates low, whether Bernanke likes it or not. People are petrified by the future and have crashed their way into the US treasury market for protection. In time, they will realize that there is no protection in US treasuries. When that happens, look out.
QE1, QE2, QE3 are massive increases in "high powered money." The money supply, currently growing at around eight percent, will eventually grow at a multiple of eight percent. When that happens, inflation and interest rates will shoot through the roof. That will be the Bernanke legacy.
None of current fiscal and monetary policy helps the economy recover from 2008. You have to even wonder if that is the purpose. Obama is on a redistribution crusade, the economy be damned. Bernanke is fighting the Great Depression. Unfortunately for Bernanke, his weaponry is doing no good.
At the end of the day, the economy needs desperately for the government to get out of the way. That's not going to happen with Obama as President and a Democratic Senate. Even the Republicans seem to be jumping on the out of control debt bandwagon.
Going over the fiscal cliff looks so much better than the available alternatives.