Yves Smith — Democrats and Republicans Pedal to the Metal in Debt Ceiling/Shutdown Game of Chicken

Yves sums up where we are now. I would add to this analysis, first, that the markets are betting on a deal, and the predominant belief is that there will be a significant upward move on its announcement, so the bias now is to be long. That could make for a larger correction if no deal, as traders rush to the other side of the boat.

Secondly, Democrats seem to be unaware of the actual political dynamic at work. This is basically two visions for America clashing in the mindset of the GOP base, and they feel strongly that they have to win this one now. Democrats are presuming "reality" will trump in the end and the party grownups will prevail over the crazies. I think that is probably wrong thinking.

Even if Boehner allows a vote on a clear bill, it may not pass. The Tea Party backers have let it be known that they will fund a primary campaign against anyone who folds, and the Chamber of Commerce announced that it would provide funding for moderates to counter it. However, the base is more extreme than moderate, so moderate GOP representatives may be reluctant in the end to vote for a clean bill.

The Democratic strategy since Clinton is to move to the right to counter GOP moves further to the right. In the end, people will vote for the real thing rather than second best. If the American people really do prefer austerity now in the false belief that government is like a household or firm, then they will choose the real champiions of austerity,

The GOP has a clear vision for America and have spent decades selling it. Democrats have abandoned the New Deal and become GOP lite, which is what Dick Morris's triangulation strategy that Clinton bought into really is. That is not a winning strategy for the Democratic Party. Obama signed onto it anyway, calling it bipartisanship. It is the reason we are here now. So far, the GOP has successively forced Democrats either to draw the line or capitulate by compromising. And so far, Democrats have compromised by moving the Overton window further rightward. So they have invited what they are getting.

Thirdly, Republicans are betting that they can keep the House in 2014 and win the Senate. If that happens, they will effectively control government other than the veto. They will force the president to veto a raft of legislation that creates the picture of an obstructionist Democratic party unwilling to work with Congress and then run on the need for a Republican president as well as Congress in 2016 to "do the business of America."

This is not an unreasonable strategy, and while bold, it has a good chance of working. Add to this a likely contraction or even a second leg down owing to a prolonged shutdown and default, and the odds for a GOP sweep increase, since as Yves points out, the party in power in the White House generally gets the blame.

Fourthly, whereas the GOP is willing to be bold in its vision and the way it doggedly goes after it, the Democrats come across as weak, timid and lacking vision and direction, like rabbits. Moreover, they appear to be beholden to Wall Street, which is about the least popular institution other than Congress and seemingly most corrupt. This does not project the image of authentic leadership, and voters are often more interested in leadership that specific policy in the form of campaign promises, since they know that it is just window dressing anyway.

The consequences of this scenario unfolding would be huge, but since it is hypothetical at this point, I won't get into what I think would be the some of the likely consequences. I hope this does not turn into reality.

Naked Capitalism
Democrats and Republicans Pedal to the Metal in Debt Ceiling/Shutdown Game of Chicken
Yves Smith