I've been waiting for this story to die away but it doesn't appear to want to. I'm observing its escalation with amused horror. Amused, because it looks like the Egyptian military government is effectively bullying the U.S. in a crisis neither really controls. Horror, because when all is said and done the losers will be the Egyptian people.

A brief recap: In December, the Egyptian authorities raided the offices of 17 humanitarian organizations. The police confiscated documents, money, computers. The government, basing its actions on a shameful and draconian Mubarak-era law, accused the groups of receiving illegal funding from overseas and operating in Egypt without proper registration.

Four of the 17 are U.S.-based organizations: the International Republican Institute (IRI), the National Democratic Institute (NDI), the International Center for Journalists (ICFJ), and Freedom House. One is German, the Konrad-Adenauer-Stiftung. Several of the groups' staffers, including such notable figures as Nasser Amin, director of the Arab Center for the Independence of the Judiciary and Legal Profession, were detained and questioned for hours on end.

The charges are ludicrous. Suffices it to say that the "revelations" publicized by the investigating judge include things like "maps of Egypt divided into four" found in the offices of one organization, cited as evidence of a nefarious plan to fragment the country. The organization in question responded that those were government-supplied maps that showed voting districts.

The funding for these groups is generally quite transparent, and all of them have filed for registration, some as early as 2005 - without ever receiving a response, positive or negative. It's also hard to claim that they've been operating out of the public eye, since they all regularly cooperate with state public institution. Both IRI and NDI were authorized to deploy election monitors to the parliamentary elections in November and January.

The only thing these organizations really did wrong was to fall in the same trap as many of us Egyptians: they assumed that freedom was on the rise. They failed to foresee the forces that were pushing in the opposite direction, or that these forces might rely on Mubarak-era dictatorial laws to prosecute them. Perhaps we should have all seen it coming. After all, the person behind this latest attack on our liberties is the minister of international cooperation, Fayza Abul-Naga, a Mubarak-era relic who has outlived a revolution and three post-revolutionary cabinets. She's the one who has been spearheading the attacks -- with the blessing of the ruling military body, the Supreme Council of the Armed Forces (SCAF).

On Feb. 6, the Egyptian authorities announced they would refer 43 people to a criminal court for trial. Of those, 19 are US citizens. Some sought refuge at the U.S. embassy. All are banned from leaving the country.

Why now? Some members of Egyptian non-governmental organizations (NGOs) believe that the purpose is to divert attention away from the military's own shortcomings by creating a hypothetical foreign attack on national sovereignty even while intimidating the very organizations most likely to criticize them for poor governance.

The American government is understandably nervous. Its official statements have wavered between miscomprehension, delicate diplomacy, and forceful objection. On Feb. 14, the U.S. Embassy in Cairo felt compelled to issue a "fact sheet" explaining the rationale behind American support for organizations promoting democracy and human rights overseas. The whole exercise felt embarrassingly tentative.

Lately the U.S. has also been sending emissaries to Cairo to clean up the mess. On Sunday, visiting Senator John McCain, who had just met with senior officials, predicted that the Egyptian government would "find an acceptable solution" to the row.(He's shown in the photo above, during a Cairo press conference with three of his fellow senators.)

The U.S. government, of course, is not a disinterested bystander. Each year Washington pays a grant of $1.3 billion to the Egyptian military (significant amounts of which, it should be noted, are siphoned off for non-military purposes). An additional $250 million (less than a fifth of the military aid) goes to food and other economic assistance. So theoretically this should give the U.S. some leverage. Members of the U.S. Congress recently tabled bills that threatened to cut aid to Cairo if the issue isn't resolved. Earlier this month 41 members of Congress sent a letter to the same effect to SCAF head Field Marshal Hussein Tantawi.

Even though I'm one of many who believe the United States should stop bankrolling dictatorial governments, these threats won't be enough to solve the impasse. Here's why:

First, the threat to cut aid just doesn't look serious. Two congressmen submit bills to restrict assistance to Egypt, but said funds remain unchanged in President Obama's proposal for the 2012 federal budget. Washington issues threats from afar but when its envoys arrive in Egypt they're all smiles and seem intent on avoiding any serious rifts. They know that SCAF holds some good cards - 19 of them, to be exact. And in the background there's the threat that the government could annul the Egypt-Israel 1979 peace treaty, a cornerstone of U.S. regional policy as well as the main motive for American military aid to Egypt.

Second, the SCAF has complete control over the state media in Egypt, and for a year now it's been using that control to create a surge of xenophobia. These latest accusations against the NGOs give it the perfect opportunity to rail against evil American designs on Egypt. After blaming the aid workers for pretty much everything but spreading cholera or kidnapping babies, last week it turned on the long-established American University in Cairo, indirectly accusing its faculty and students of being a "tool" of the American government. Then, via its Muslim Brotherhood allies, it turned its fire on Anne Paterson, the U.S. ambassador to Egypt, accusing her of "leading a U.S.-Zionist scheme to induce sedition in Egypt as she did in [her previous posting in] Pakistan." These are a lot of fronts for the U.S. to fight on at once, and the Americans are likely to prefer resolving the issue as rapidly as possible.

It may sound irrational for a client state to play chicken with its benefactor, but from its own perspective SCAF doesn't really have anything to lose. That's because SCAF isn't betting with its own money: it's betting with Egypt's finances as well as its international reputation and credibility - but as it has repeatedly shown over the past year, these are things it doesn't really seem to care about much. Sure, the U.S. provides subsidies for wheat, a staple of the Egyptian diet. But the army produces its own bread, so there's no need to worry about that. And so what if xenophobia is on the rise, the tourism industry decimated? None of that has much bearing on the army's resources.

If SCAF wins and the U.S. folds, that will reinforce SCAF's brutal hold over Egyptian civil society while maintaining its funding.

And even if the Americans follow through on their threats to curtail aid, SCAF will win populist points (heartily supported by the state media machine) for having "stood up" to the United States. And the generals will have no scruples about making up the difference from the national budget, especially when it's controlled by their political allies from the Muslim Brotherhood, which now dominates Parliament. In fact, SCAF's cheerleaders have been suggesting raising the equivalent amount of the U.S. assistance from all Egyptians under the guise of "achieving sovereignty." (That this would primarily benefit SCAF at the expense of ordinary people goes without saying.)

And now the Muslim Brotherhood has chimed in, declaring it will seek to review the Egypt-Israel 1979 peace treaty if the United States cuts assistance to the country.

An end to the crisis is probably near. Everyone, including SCAF, realizes that the accusations are a sham, and that the whole thing is intended to intimidate civil society and thwart criticism of the government's human rights violations. The accused Egyptians and Americans will be eventually acquitted (the Americans probably sooner). The terms of their release are unknown, but they will almost certainly include maintaining U.S. aid. The main victims will be weakened Egyptian civil society, Egypt's public image in the U.S., and U.S.-Egyptian relations as a whole.

There are, however, a few signs of hope. One of them is that the congressional debate about aid to Egypt may finally help Americans to comprehend the extent to which subsidizing a military dictatorship damages U.S. standing. If that actually comes about, then this whole crisis will not have been in vain.