Ouch. A full two weeks before the ultimate deadline, Republicans are already willing to cut a deal that will add another $100 billion to the deficit. It wasn't so long ago that these same Republicans were playing last-second brinksmanship while threatening to shut down the federal government in fervent protest of Big Government. Since when did the Tea Party become so meek?

If the consensus reporting from Capitol Hill is correct, sometime in the next two days, Republicans and Democrats will agree on a deal that keeps the payroll tax cut in place, extends unemployment benefits (albeit with a gradual reduction in the length of benefits put into place) and, once again, protects doctors from a cut in their Medicare reimbursement rate. The unemployment benefits and the so-called doc fix will purportedly be paid for by a combination of wireless spectrum sales, tweaks to how much the federal government contributes to federal worker pensions, and cash carved out of the health reform deal.

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Both sides more or less agree that it would be a bad idea to raise taxes and cut benefits during a weak economy -- the question is what kind of pound of flesh will be extracted in exchange for a deal. Democrats want to pay for the extensions by taxing millionaires. Republicans want to pay for the measures by scooping money out of Obama's priorities, such as health care reform, while pursuing their own agenda -- gutting EPA regulations, getting the Keystone XL pipeline built, making it harder for poor women in Washington D.C. to get an abortion.

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The most obvious proof that investors aren't really alarmed by the prospect that partisan political gridlock will continue as least until the end of 2012 comes from the bond market. U.S. Treasury yields fell again, probably because investors who are continuing to be spooked by Europe's sovereign debt woes are looking once again for the safest place to put their money. Despite all its faults, the U.S. economy is still growing faster than Europe's, and the prospect that we will default on our debts still seems to be much lower than the chances that Europe won't fix its own mess.

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In a tit-for-tat battle, the Senate first used a near party-line vote of 59-36 to derail the measure from the Republican-run House. The House bill would fund federal agencies and provide $3.7 billion in disaster assistance, partly paying for that aid with cuts in two loan programs that finance technological development.

Then, Senate Republicans refused to let the chamber vote on a compromise offered by Senate Majority Leader Harry Reid, D-Nev., that was similar to the House version but lacked the loan program cuts. A vote on Reid's measure was set for Monday afternoon, but Republicans seemed likely to prevail because Democrats would need 60 votes to win -- exceeding the 53 votes they have.

The basic dispute pitted GOP objections that the bill's emergency spending was too costly against Democratic complaints that cutting the energy loan programs would stifle the economy and cost jobs.

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The GOP-dominated House early Friday muscled through a $3.7 billion disaster aid measure along with a stopgap spending bill to keep the government running past next Friday. The narrow 219-203 tally reversed an embarrassing loss for House GOP leaders that came Wednesday at the hands of rebellious tea party Republicans.

Even before the House vote, however, the leader of the Senate promised that majority Democrats will scuttle the measure as soon as it reaches the chamber on Friday. Democrats there want a much larger infusion of disaster aid and they're angry over cuts totaling $1.6 trillion from clean energy programs -- and the strong-arm tactics being tried by the House.

Senate Majority Leader Harry Reid, D-Nev., said the House plan "is not an honest effort at compromise. ... It will be rejected by the Senate."

The combination of events promises to push the partisan war into the weekend and could increase the chances that the government's main disaster aid account at the Federal Emergency Management Agency might run dry early next week.

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The Senate minority whip may be the most outspoken member of the Joint Select Committee on Deficit Reduction when it comes to the military budget, but the Democrats currently considering whether to cut the deficit via reductions in defense spending or programs like Medicare and Medicaid have received far more money from Pentagon contractors than Kyl or any of their Republican colleagues on the panel, according to an investigation by Alternet, with assistance from the Brave New Foundation and Salon.com. 

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The president's proposal aims to reduce spending in mandatory benefit programs, including Medicare and Medicaid, by $580 billion and counts savings of $1 trillion over 10 years from the withdrawal of troops from Iraq and Afghanistan.

Obama's recommendation to a joint congressional committee served as a sharp counterpoint to Republican lawmakers, who have insisted that tax increases should play no part in taming the nation's escalating national debt. The new taxes would predominantly hit wealthy Americans, ending their Bush-era tax cuts and limiting their deductions.

"It's only right we ask everyone to pay their fair share," Obama said.

Responding to a complaint from Republicans about his proposed tax on the wealthy, Obama added: "This is not class warfare. It's math."

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Obama's tax plan is aimed predominantly at the wealthy and draws sharp contrasts with congressional Republicans.

It comes just days after House Speaker John Boehner ruled out tax increases to lower deficits. It also comes amid a clamor in his own Democratic Party for Obama to take a tougher stance against Republicans. And while the plan stands little chance of passing Congress, its populist pitch is one that the White House believes the public can support.

The core of the president's plan totals just more than $2 trillion in deficit reduction over 10 years. It combines the new taxes with $580 billion in cuts to mandatory benefit programs, including $248 billion from Medicare.

The administration also counts savings of $1 trillion over 10 years from the withdrawal of troops from Iraq and Afghanistan.

The deficit reduction plan represents an economic bookend to the $447 billion in tax cuts and new public works spending that Obama has proposed as a short-term measure to stimulate the economy and create jobs. He's submitting his deficit fighting plan to a special joint committee of Congress that is charged with recommending deficit reductions of up to $1.5 trillion over 10 years.

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Painful as it is to remember, the August debt deal -- which got the country past the crisis provoked by the Republicans' refusal to allow an increase in the debt ceiling -- requires the supercommittee to find at least $1.2 trillion in budget cuts over the next 10 years. If the 12 congressional Republicans and Democrats on the committee fail to agree on those cuts, automatic reductions are supposed to take place, including $492 billion in the defense budget and over $400 billion elsewhere, according to the Congressional Budget Office.

Politically, the idea was to apply pressure by threatening the unthinkable, i.e., "We'll shoot the hostage." Either the supercommittee will cut a deal, or the defense budget gets whacked.

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The NFL opener coincided with the start of negotiations among members of the congressional supercommittee, tasked with crafting a long-term financial plan for our country. Unfortunately, the prospects for a crowd-pleasing, conciliatory ending seem much less likely.

This powerful committee held its first public hearing on Tuesday. Its "fans" -- corporate lobbyists of all stripes -- went wild, rushing the Capitol and positioning to get the biggest bang for their clients' bucks. One candidly revealed his best offensive strategy: "writing 12 really large checks." No doubt prominent campaign contributors of past elections, like the telecom giant AT&T and the abortion-rights advocate Emily's List, are also expecting front-row seats.

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To wit:

1) In "Another Deficit Standoff This Year? Maybe Not," the Wall Street Journal's Gerald Seib writes that "there actually are reasons to think [the Super Committee's] effort can work better than the summer's follies." Seib cites the closeness to party leaders of the Super Committee's membership, the drop in popularity ratings that accompanied the debt ceiling debacle, and changes in the Senate's rules that limit the ability of malcontents to filibuster an agreement produced by the negotiating team.

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Politico's Ben Smith FOIA'd the presentation that the credit rating agency saw before deciding to raise the Massachusetts credit rating from AA- to AA. In it, Romney's administration pointed out how the state raised taxes in 2002 (before he took office) during an economic downturn and how, as governor, he introduced legislation to raise revenues including closing tax loopholes.

Romney, currently the front-running Republican in the 2012 presidential race, has used the successful '04 bid to raise the Massachusetts credit rating as a talking point against the president in the wake of S&P's downgrading of U.S. debt. Romney said, "when I was governor, S&P rewarded Massachusetts with a credit rating upgrade for our sound fiscal management and the underlying strength of our economy."

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As he always does, Paul Krugman described "the stupid narrative" best in a short blog post, "The Downgrade Doom Loop." It may go like this, he warns:

1. US debt is downgraded, sparking demands for more ill-advised fiscal austerity

2. Fears that this austerity will depress the economy send stocks down

3. Politicians and pundits declare that worries about US solvency are the culprit, even though interest rates have actually plunged

4. This leads to calls for even more ill-advised austerity, which sends us back to #2

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"The United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default," said Greenspan on NBC's "Meet the Press."

He said that the S&P downgrading of U.S. debt -- more than indicating a genuine risk of default -- "hit a nerve that there's something bad going on." He said the move "hit the self-esteem of the United States, the psyche… . It’s having a much profounder effect than I conceived could happen."

Greenspan said too that the downgrade would likely precipitate market turmoil, but that the possibility of a double-dip recession depended on Europe..

Appearing alongside Greenspan, Austan Goolsbee, the chairman of the White House's council of economic advisors, hit out at S&P. "Well, the basic case is they made a $2 trillion math error and forgot to check their work," he said. "So rating agencies that didn't make a $2 trillion math error reaffirmed the AAA status."

Watch the clip below:

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There are great paradoxes inherent in this move. During these troubled times, United States Treasury bonds are still currently considered one of safest places to put your money in the world. And that may continue -- the black humor traded by financial journalists is already flying. As CNBC's John Carney tweeted, "Can't wait for headline: Treasuries Rally As Investors Flee to Safety Following Downgrade."

The practical impact of this downgrade may not immediately change anything -- U.S. Treasuries will still be desirable in an uncertain world.

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Except, the Dow Jones industrial average has been dropping for eight straight days, and the sell-off accelerated as it became clear that the deal was done. How ironic!

But it's almost certainly wrong to attribute Tuesday's big sell-off, as some commentators would like us to believe, to the sudden realization that a fiscal contraction is sure to retard future economic growth. By Tuesday, investors had already figured out that there was going to be a deal -- that scenario, as the market-watchers like to say, was already "priced in." What they didn't know, and what has been fueling negative investor sentiment all week, was how bad the numbers on manufacturing activity and consumer spending were going to be. There has been almost no good news in the economic data for several months now. Each additional negative piece of data solidifies a bleak narrative: The economy has stalled.

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Which is another budget showdown, as soon as the end of next month, with all sorts of shiny new opportunities for hostage taking, extortion, grandstanding and, best of all -- spending and tax decisions that fail to address our pressing economic needs.

Just a few weeks after the House and Senate come back from the summer recess, three things will happen. The U.S. government will need to raise the debt ceiling again, the federal gas tax will expire, as will, most important, the continuing resolution that authorizes government spending.

Let's break these three opportunities for congressional warfare down:

The debt ceiling:

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What I didn't anticipate was the stock market's reaction to a debt deal. I didn't think it would trigger a market surge, but I don't think anyone anticipated that in the two days since the deal was announced Sunday night, the market would lose all the gains it made so far in 2011. It's now clear that it's not just the voters -- the markets are more concerned about the weak economy than the deficit. If the jobs numbers expected Friday are bad once again, look for a deeper market plunge.

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But even worse than the suffocating anticlimax was the feeling of dangerous pointlessness. Because even as congressional leaders and the president, amid their endless torrents of mutual recrimination, devoted countless hours in recent weeks to crafting a deficit reduction plan, economic conditions in the U.S. have been steadily deteriorating. We haven't had any surprises on the debt ceiling front since Sunday, but we have learned a couple of new things about the economy.

On Monday, an index of manufacturing activity delivered its worst performance in two years. On Tuesday, the Commerce Department reported that consumer spending fell for the first time in 20 months.

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The debt deal is bad economics, dishonest government, and surrender to blackmail. The alternative is not default, but government under the Constitution.

On the economics: by slowly choking off public services, public investment and regulation, the deal sets the economy on a path to strangulation. Every dollar cut from the budget, now or later, is a dollar less of private income. Less private income means less consumption, less private business investment, fewer jobs. Tax revenues will fall, and the deficits and debt will in the end not be reduced. The so-called “cloud of debt” will not lift. Contrary to the foolish claim made by the White House today, there is no magic by which “lifting a cloud of uncertainty” produces growth. There is no confidence fairy.

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