Markets soar after US dodges financial meltdown

Relief: Traders on the New York Stock Exchange celebrate this week’s narrow escape © Getty Images

As the world welcomed in 2013, the USA was teetering on the brink of financial catastrophe. A last-gasp deal staved off the meltdown for now – but American politics remains in crisis.

As midnight struck on New Year’s Eve, America’s top politicians were in no mood for a party: the start of 2013 represented the edge of the dreaded ‘fiscal cliff’, which threatened to throw the USA into a financial crisis deeper than any that has come before. Taxes would rocket, vital spending would be slashed and every citizen would become instantly poorer.

Throughout December, senators, congressmen and President Obama had been frantically negotiating in an attempt to produce a deal that would prevent this nightmare scenario from becoming a reality. But the demands of the two major parties, the Democrats and the Republicans, were so far apart that talks had repeatedly stalled.

And so America did indeed fall off the fiscal cliff. But it did not fall very far. Two hours after midnight, senators overwhelmingly voted to pass a last-minute package of laws to override the catastrophe. Most tax rises were cancelled, while taxes on the wealthy increased – though not as much as Obama would have liked. The following day, the bill was narrowly passed in House of Representatives, and the crisis was averted.

In the past day, the stock markets have breathed a mammoth sigh of relief. Stocks soared by over 2% in Europe, Asia and America, with the London Stock Exchange hitting highs unseen throughout 2012.

But this is only a respite. Though deals have been made on the crucial matter of taxes, decisions on how to spend this revenue remain unresolved. Many commentators fear that with its main players so polarised in their beliefs, American politics is stuck on an endless cycle of brinkmanship and narrowly-averted crises.

How has it come to this? In short, because many US politicians are fiercely opposed to any compromise on their core convictions. The right-wing Republican Party is especially inflexible, with many of its members having pledged to vote against literally any tax rise, no matter what the consequences.

No compromise, no surrender

That is a suicidal way to run a country, says Obama: politics ought to be about finding a consensus that everybody can accept, not just yelling impossible demands until something gives. What ideologues call ‘sticking to your convictions’ is really just selfish, childish stubbornness.

But some have a different perspective – and not only Republicans. If Obama had been firmer, say less co-operative Democrats, perhaps he would have got exactly what he wanted rather than just some of it. Sure, it means a lot of wrangling – but that is the nature of the game. Politics, like most things in life, is a struggle: anybody who compromises before they are forced to is simply letting the other side win.

You Decide

  1. Is willingness to compromise a virtue or a weakness?
  2. Is it ever acceptable for politicians to break a promise? What about ordinary people?


  1. Organise a roleplay in which two sides with very different agendas must negotiate to get what they want. If no solution is found by the end of the lesson, the worst-case scenario kicks in. Can you reach a compromise?
  2. Draw a diagram that shows the structure of US government, including the President, the House of Representatives and the Senate.

Some People Say...

“To me, consensus seems to be the process of abandoning all beliefs, principles, values and policies.’Margaret Thatcher”

What do you think?

Q & A

Why is everybody so obsessed with American politics?
Good question – perhaps we should all pay more attention to what goes on in other countries as well. But it’s not just a strange fixation: the USA is the most powerful country in the world, and whatever happens there has repercussions for us all. If America had truly gone off the ‘fiscal cliff’, that could have triggered recessions across the Western world.
But this debate over consensus is pretty narrowly about US politics, right?
Not at all – it applies to plenty of different areas. In the business world, for instance, some treat negotiations as a battle in which everybody is trying to get their own way. Others aim for a deal that benefits everybody. That leads to very different approaches.

Word Watch

Fiscal cliff
In 2011, the US government was almost forced to shut down when Republicans blocked efforts by Obama to raise the amount of debt the government could legally accrue (usually a standard annual measure). A short-term solution was found, but to force the government to negotiate a better deal a package of panic-inducing tax rises and spending cuts was scheduled for January 1, 2013, if no other agreement could be reached to override it. This became known as the ‘fiscal cliff’ – though this metaphor is widely hated by economists and linguists alike.
‘Revenue’ is the money regularly coming into a government, business or household. State revenue is raised by taxing the population in various ways.
Any tax rise
Any change in taxes and spending in the USA must be agreed by both the President and both Houses of Congress. Many Republicans (who control the House of Representatives) have signed a pledge created by anti-tax activist Grover Norquist that they will never vote for any rise in taxes; but since this deal contained tax rises, some of these pledges have now been broken.

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