“We are not a deadbeat nation,” noted President Obama in his last press conference while repeating his refusal to negotiate with the Republicans under the threat of debt-default. This ultimatum may have worked—last Friday, the House Republicans, after three days of deliberation behind closed doors, agreed to raise the debt ceiling for three months. Albeit, with one condition—if Congress does not pass a budget by April 15, its pay is withheld. In retrospect, the decision was sensible. Because, already bruised from a disastrous electoral result and fiscal cliff dealings, the Republicans would have swung public opinion heavily against them had they seemed willing to take the US to insolvency just to pass their own agenda. Alternatively, this spells another post-election victory for President Obama—not only did he get the GOP to raise taxes after more than two decades, he got them to cave-in over the debt-ceiling.
Yet this does not end Washington’s penchant for more ‘cliffs’. The delayed issue of the debt ceiling, the $110 billion spending ‘sequesters’, is to be resolved by March 1 and, if the Republican proposal is accepted, a budget to be passed by April 15. Either side holds the bait for the spending sequesters, the Democrats do not want Social Security to be cut, whilst the Republicans wish to save the military, which shall be hit the hardest if automatic-spending cuts are to go on. However, the Republicans may hold the cards when it comes to the budget, since the Democrat-controlled Senate has failed to pass one for the past four years. In other words, Washington to-and-fro will continue.
But with Republicans relaxing their radicalism, and Democrats being forced to confront their obstinacy over Medicare and Social Security, we can expect the end of extreme brinkmanship that ideological polarisation has brought about in Washington. This would calm the markets and reinforce a somewhat muted American economic recovery.