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Why America's budget crisis has been averted, but not solved

President Obama also warned Congress not to play with fire by blocking a debt ceiling increase. Photo: Reuters

As financial markets around the world began opening for business for the first time in 2013, America's dysfunctional politicians finally acted.

A deal was struck at the 11th hour and 59th minute to avoid sending America over the infamous fiscal cliff. If the country had plunged over the edge, the US would have tilted back into recession.

Most experts agree that America's economy would have been severely damaged by the automatic tax increases and spending cuts that would have taken effect had this deal not been struck.

Despite all the drama and political theatre, Obama will be satisfied. Credit: Reuters

So breathe a sigh of relief. But don't make it too deep.

This crisis has been averted, not solved.

Within weeks, an even more consequential battle will be waged over America's debt ceiling and over how to implement essential spending cuts.

So as they say in this town, fasten your seat belts for a roller-coaster ride the American people can't get off.

Congress is split along deep ideological lines and there are Republicans who will never vote for a tax increase whatever the circumstances.

Just before midnight here in Washington, the President emerged into the White House press room.

He called the deal a victory for common sense but "just one step" towards a larger agreement - the much discussed "grand bargain" - to strengthen the US economy and get control of the deficit.

President Obama also warned Congress not to play with fire by blocking a debt ceiling increase.

This is not a triumph for the White House, but it's a glimpse into the compromises Obama is ready to make. Credit: Reuters

That, he said, would be truly catastrophic.

Overall, despite all the drama and political theatre, Obama will be satisfied.

The Republicans are in disarray.

This is not a triumph for the White House, but it's a glimpse into the compromises he is ready to make.

This is Obama the pragmatist in action.

The President knows his second term will be dominated by continuing skirmishes and more ominous deadlines.

We've had the fiscal cliff. Now get ready for the debt abyss.

Then brace for many more political and economic precipices ahead.

More on this story

  • What is America's 'fiscal cliff'?

    Democrats and Republicans have so far failed to agree on an alternative plan to the tax increases and spending cuts scheduled for January 1.