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Political Brinksmanship Still Threatens US Economy

President Barack Obama warned Republicans late Tuesday that "if Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic, far worse than the impact of a fiscal cliff."

Meanwhile, the economy doesn't have much growth to give. Mark Vitner, senior economist at Wells Fargo, predicts it will expand just 1.5 percent in 2013, down from a weak 2.2 percent in 2012. Unemployment stands at 7.7 percent.

Ben Schwartz, chief market strategist for Lightspeed Financial, said unemployment was still likely to edge up and retail sales growth was likely to be weaker than last year.

"Regardless of a deal getting done, people on Wall Street are not going to run around giving high fives" in celebration, Schwartz said. "The federal government is obviously dysfunctional, to say the least."

The months-long political standoff over fiscal policy has already taken its toll, adding uncertainty that has discouraged consumers from spending and businesses from hiring and investing.

The fiscal cliff, with its Jan. 1 deadline to reach a deal over taxes and spending, was created to force Democrats and Republicans to compromise, and it barely succeeded. Without a deal, more than $500 billion in tax increases would hit the economy in 2013 alone, along with $109 billion in cuts from the military and domestic spending programs.

Negotiations to avert catastrophe have highlighted once again how far apart the two parties are on taxes (Republicans don't want to raise them) and spending (Democrats are reluctant to cut government programs).

"What induces the two sides to stop fighting and start compromising?" asked Ethan Harris, co-head of global economics at Bank of America Merrill Lynch.

Political gridlock has been rattling financial markets and shaking consumer and business confidence the past two years.

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