A macho game of chicken over America’s debt ceiling?

They are playing with fire, or at least the economy of the world’s most powerful country. But after days of talks and tense negotiations, the stand-off over America’s debt crisis is nowhere near resolved, just days before the country could tip into an unprecedented debt default.

Democrats and Republicans are now even more divided, distrust and recrimination is rife – and amid much spinning and posturing, the two parties are intent on sticking to completely rival plans. The markets, predictably enough, are already jittery after the weekend’s talks fell apart once again.

D-Day is 2 August when without a deal to raise America’s debt ceiling the US Government will be in default, putting all sorts of spending commitments at risk. It also risks losing its AAA credit rating, which will make everything from government borrowing to home mortgages more expensive.

Today, then, leaders from both parties want to put forward a plan that will keep the markets satisfied, while coming up with the right mix of spending cuts and other measures to cut the deficit by trillions of dollars.

House speaker John Boehner, propelled into a more conservative position by the Tea Party wing of his party, has a plan to raise the debt limit in two stages: a $900bn hike this year, followed by a $1.6tr increase next year, with spending cuts to be decided by a 12-member committee drawn from both House and Senate.

The GOP is resolute in its refusal to accept any new tax revenues to ameliorate the spending cuts – and, of course, Boehner’s plan would keep the issue running well into election year.

Senator Boehner’s plan, no matter how he tries to dress it up, is simply a short term plan. Harry Reid

Nevertheless, discussions on Sunday seemed to be making some progress, as Boehner’s opposite number Harry Reid tried to make the proposal more acceptable to Democrats.

But after a late-evening dash into the White House, Reid emerged to declare the Republican cuts were unacceptable. “Senator Boehner’s plan, no matter how he tries to dress it up, is simply a short-term plan and is, therefore, a non-starter in the Senate and with the President.”

In its place, Reid is pushing his own $2.7tr deficit reduction plan – which does not include any tax hikes, although Barack Obama has insisted that they should be part of any final deal.

But to keep his own party on board, the spending cuts, to be phased in gradually over the next 10 years, also exclude any cuts to welfare entitlements like Medicare.

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John Boehner has accused President Obama of putting his own political interests first by threatening to veto any plan which does not extend the debt ceiling until well into 2013: “I know the President’s worried about his next election. But my God, shouldn’t we be worried about the country?”

But for Treasury officials it is more important to show the markets that there is some long-term stability and get the uncertainty out of the system.

As Tim Geithner said last night: “The idea that were going to spend another seven months lifting the cloud of default from the American economy, it seems an irresponsible approach.

“It would be bad for the economy. And we don’t think that makes sense – and there’s no reason why we have to do it that way.”

If the markets are looking for stability, though, they will not get much succour from the tenor of the political debate, with the President himself seemingly confined to the sidelines and the Republicans growing still further entrenched.

The country could be left with just two rather unpalatable options to avert a catastrophic scenario on 2 August: a short- or medium-term increase in the debt ceiling, or the President could invoke the 14th Amendment and declare that the debts of the United States would be paid.

The short-term solution, dubbed “appease and delay”, isn’t popular with the Democrats. They fear it would simply create yet more uncertainty in the economy while still risking a credit downgrade – and they are accusing the GOP of “playing a dangerous game of chicken with the economy” under pressure from the Tea Party wing.

For Republicans, this is all about Obama. According to Politico, this is what the leadership is thinking: “Republicans will not give him a $2.4 trillion blank cheque he can use throughout his re-election campaign to continue the spending binge that has driven our nation to the brink of a job-destroying downgrade and default.”

Except the reason for America’s budget-busting debts may not have been a runaway spending binge after all. The New York Times points out that the deficit is largely due to the tax cuts and war spending built up under President Bush, plus diminishing revenues caused by the recession. “Mr Obama’s policies, (projected forward) to 2017, add to deficits, but not by nearly as much.” it points out.

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Hence one idea the Democrats are pushing – that any cuts package should factor in how much the country will save as a result of winding down the wars in Iraq and Afghanistan, which have cost more than $1tr over 10 years. An idea, however, the Republicans are completely unwilling to accept.

So while the bickering continues on Capitol Hill, the markets are left appealing to common sense. As one investment advisor told Politico earlier: “The whole world is engaged in a kind of silent run on the bank… think of it as the calm before the storm. Markets are already scared. They’re looking for reassurance and a more mature dialogue.”

And that is true of the American public too, most of whom would like their politicial leaders to stop with the macho game of chicken. According to Gallup, more than two-thirds of Americans just want to see a deal, any deal – even if no-one’s totally happy with it. When the economy’s this close to the edge of the cliff, compromise, surely, is the only solution.

Felicity Spector is a chief sub-editor at Channel 4 News. Follow her on Twitter @felicityspector