The underpants gnome theory of Israel/Palestine

My colleagues Matthew Yglesias and Jeff Goldberg are having a lively argument over the West Bank settlements, and the infamous Walt & Mearsheimer. Says Matt:

But of course Walt and Mearsheimer didn't say that all Jews are acting against the best interests of their country (which would be outrageous) nor did they say that some Jews are acting against the best interests of their country (which would be trivial -- Jews disagree about lots of stuff and some of us must be wrong). Rather, they said certain "pro-Israel" institutions, including AIPAC, are harming American interests.

Goldberg, meanwhile, charges AIPAC with preventing the United States from putting any meat on the bones of its policy against Israel's West Bank settlements. Walt and Mearsheimer agree with this. Goldberg argues that unless Israel removes those settlements, it will increasingly find itself becoming an apartheid-style country where a Jewish minority rules over a disenfranchised Arab and Muslim minority. Walt and Mearsheimer think so, too. The difference is that Goldberg primarily sees this as bad for Israel whereas Walt and Mearsheimer primarily see it as bad for the United States but surely it can be bad for both! And even if not, the disagreement here is about something relatively minor with both sides agreeing that the American failure to apply pressure is a bad thing, and both sides pointing the finger at AIPAC.

Surely there should be room for some difference of interpretation here that doesn't involve either party to the dispute being motivated by racial hatreds.

Leaving aside the evergreen argument about who sucks more, what I genuinely don't understand is what the proponents of West Bank settlement think their end game is. I know what they want, which is to annex the West Bank. But given that

1) The Palestinians will not voluntarily leave no matter how miserable you make them, especially since many of them have nowhere to go

2) Israel is not going to do what it would take to get them to leave, which is to round them up and force them at gunpoint, while killing lots of them, including women and children, to make their point.

3) Even if Israel did do so, the international community would stop it. Even the US is not going to support anything that involves millions of women and children being moved across the border at gunpoint

4) Neither Egypt nor Jordan would take the shreds that the settlers would presumably like to leave all the remaining Palestinians in, however much fantasizing people may do about how someday Egypt and Jordan are going to decide the Palestinians are their responsibility instead of Israel's.

An occupation cannot go on indefinitely. At some point, you stop being the occupier and start being the government, even if you don't want to govern those people. In a decade or so, unless the Palestinians get their own state, Israel is going to start facing growing pressure to give the Arabs in the West Bank full political rights.

In other words, the Israelis are not going to get the land without the people; they're a package deal. And if they get the people, demographics being what it is, they will lose a Jewish state. Even if the Arab majority doesn't start kicking the Jews out, all the particularly Jewish institutions of Israel will eventually be totally undermined.

It's like the hardliners have an underpants gnome theory of expansion:

1) Build settlements
2) ???
3) Greater Israel

What feasible strategy do they think goes between 1 and 3?

Note: When I say "Leaving aside the question of who sucks more", I really mean it. I will ruthlessly delete any comment on this thread that even faintly whiffs of "Arabs are barbaric animals/Zionists are fascists", rehashes who has done what to who, or makes claims about how who would have treated whom in different circumstances. Those debates convince absolutely no one, and they invariably degenerate into flame wars. However you feel, go rant at your friends about it.