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Debt ceiling: If $4 trillion 'grand bargain' fails, is America in trouble?

Debt ceiling talks could result in a $4 trillion 'grand bargain,' or a smaller $2 trillion deal. Most economist say the bigger deal would be more helpful – and send a positive message to markets.

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Mr. Obama said both sides are determined not to let things get to the brink of a Treasury default.

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A $2 trillion bargain, like a larger one, would avert the risk of an near-term default by the Treasury.

But it might mean that Obama and Congress have to bargain again over the debt limit before the next election.

Moreover, unless such a deal is paired with commitments by both parties to keep working for additional progress, the move might signal to investors that the US political system is broken. The problem: control of government is divided between two parties that can't find common ground on the core issues of entitlements and taxes.

To many Republicans, the bottom line in negotiations is that any deal should not raise new tax revenue.

Democrats, meanwhile, are holding the line against any reduction in entitlement benefits. If those positions don't budge, it becomes nearly impossible to reach the $4 trillion target (which would cut projected deficits nearly in half).

Even to reach the lesser target of $2 trillion, the two sides may need to bend from cherished positions. "I don't see a path to a deal if they don't budge," Obama said Monday, in a reference to congressional Republicans and in an effort to cast himself as centrist, coaxing left and right to keep bargaining.

But the two sides remain far apart on the tax issue, with Democrats arguing that "shared sacrifice" should include higher taxes paid by the richest Americans.

Obama called for a "balanced" deal involving some new tax money.

Speaker Boehner fired back Monday that "adding tax increases to the equation doesn't balance anything" for Americans beset by 9.2 percent unemployment. Boehner argued that Democratic policies would impose taxes on "the very people" who are being asked to create jobs.

Although a $4 trillion deal would be preferred by many budget experts, it's far from certain that a failure to reach that goal would result in a creditor revolt by 2012. Nor is it certain that firms like Moody's and Standard & Poor's would move to downgrade America that soon.

But most economists say that fiscal reforms are vital for the economy, and that ultimately they must including putting Social Security and Medicare on sustainable footing.

At the same time, as important as the debt talks are, economists say other policies to boost the job market are also needed.

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