US President Barack Obama defied conventional wisdom by winning being re-election despite a frustratingly slow-growing economy and persistent high unemployment. During months on the campaign trail against Republican Mitt Romney, Obama insisted he should stay in the White House to finish the job of digging the country out of the worst downturn since the Great Depression.
After the confetti-filled celebration in his home of Chicago, Obama will return to Washington to face the music. The US political and budget crisis that looms at year's end received little mention by either candidate. Yet, unless Republicans and Democrats come to agreement, the "fiscal cliff" - the ominously nicknamed wrenching austerity measures already in law - will be reached on December 31. If the two sides fail to reach a compromise, possible side effects include a government shutdown and even a bond default.
A 2011 compromise to raise the federal borrowing limit led to legislation sharply cutting domestic and military spending as of January 1, while a variety of past tax cuts expire on the same day. The combination of spending cuts and tax increases - estimated at 600 billion dollars in 2013 alone - has been widely forecast to stall the already slow economy or even throw the United States back into recession.
The US central bank, the International Monetary Fund and the Congressional Budget Office have all warned of the damage to growth and employment if current law stands unchanged. The tax hikes and spending cuts will translate into a reduction in economic growth of about 4 percent, and a surge in unemployment from 7.9 percent to 9.5 percent, according to economist Nathan Sheets of Citigroup. Instead of growing 3 percent in 2013, Sheets estimated the US economy would shrink by 1 percent.
Tuesday's election results confirmed that Republicans will retain control of the House of Representatives, while Democrats preserved their Senate majority - the same divided government that left Washington in gridlock for the last two years. House Speaker John Boehner signalled that Republicans would persist in passing a budget with tax cuts and lower spending that US President Barack Obama and the Democrat-controlled Senate have rejected.
"In the face of the staggering national debt, our majority passed a budget that begins to solve the problem," Boehner told Fox News. "We offered solutions, the American people want solutions, and tonight they responded by renewing our House Republican majority." His comments signalled continuing gridlock in Washington, although analysts believed the pressure for a solution would be greater than the inertia of the gridlock.
"The belief is that Congress will be more prepared to water down the wine during a lame duck session than when circumstances revert to 'normal,'" blogged analyst Andy Langenkamp at ECR Research and Interest & Currency Consultants, in the Huffington Post. Late last month, Obama provided a glimpse into what he would do, in an interview with the Des Moines Register newspaper in Iowa. He said he believed he could reach a deal with Republicans within the "first six months."
"It will probably be messy. It won't be pleasant," he said. "But I am absolutely confident that we can get what is the equivalent of the grand bargain that essentially I've been offering to the Republicans for a very long time." He proposed 2.5 dollars in spending cuts for every dollar in tax increases. US debt stands at 16.2 trillion dollars, and the annual deficit last year was 1.3 trillion dollars, or 8.5 percent of GDP.
Until now, the US has kept its reputation as a safe port for investment and has been able to finance its debt from abroad. But the last stand-off in Washington in August 2011 rattled investors and prompted the credit rating agency Standard & Poor's to downgrade US federal government debt, and another round of brinksmanship could test the patients of markets.
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