If you could ignore the biting cold that has descended over the US east coast, the past few days have been unforgettable. In more than 20 years, I can never remember Washington looking better or feeling happier. The buildings have been spruced up and bedecked with flags and bunting, the T-shirt and souvenirs are selling like hot cakes and the hundreds of thousands of folk who have flocked to town for the inauguration of Barack Obama today, wearing everything from day-glo hats to floor-length furs, are carrying themselves with an almost palpable sense of enjoyment and expectation.

On Sunday afternoon I walked almost the entire length of the Mall, pausing at the Washington Monument to look down the reflecting pool to the Lincoln Memorial, the perfect stage for a spectacular concert, with Bruce Springsteen, U2, Beyoncé and others. The proceedings drew to a close with Pete Seeger, 90 years old in May, and looking (a friend of mine said) like a friendly elf, leading the crowd in a singalong to This Land is Your Land. It was a moment of pride, fun and promise.

It is quite something, the inauguration of America's 44th President. To an astonishing extent, cynicism and partisanship have been put aside. I can't remember a time when Americans of every political leaning so obviously wished their new president well.

I remember the mood in Washington 16 years ago, when Bill Clinton was preparing to take office. Among conservatives there was already a sense that he was an almost illegitimate chief executive who had somehow wrested the presidency from George Bush the elder; among Washington's policy-makers there was dismay at the incompetence and cock-ups that had marked the transition period from the election; and Georgetown's hostesses were bemoaning the déclassé style of the hicks Clinton had brought with him from Arkansas.

There's none of that this time. In part - but only in part - the new mood has taken shape because the election of an African-American has reaffirmed the nation's sense that its values exist as more than rhetoric, and that its democracy can constantly renew itself.

There's also Obama himself, a man who seems to combine gravitas and wisdom with a smile that can light up a room, and who has demonstrated extraordinary self-confidence since November, surrounding himself with a team of all the talents, and - a few inevitable hiccups notwithstanding - managing the transition with a sure hand. As Clinton was never able to do, Obama has already convinced Americans that he intends to be the President of all of them, whether they voted for him and share his politics or not. At a party this weekend, I heard a former conservative member of Congress say that, with Obama's election, America had at last been able to put behind it the bitter, long-lasting cultural and political divisions that had their roots in the Sixties.

But today's mood is the way it is mainly because of the circumstances in which Obama takes office. This is not a time for America to show division and backbiting; the challenges it faces are too daunting for that. At home, the economy is in a tailspin, with fresh job losses mounting by the day. Circuit City, the best-known "big box" retailer of consumer electronics, closed at the weekend, throwing 34,000 people out of work.

It's common to hear economists say that even if Obama wins a second term, his whole time in office will take shape in the shadow of an economic crisis the like of which has not been seen since the Great Depression. Overseas, America is at war on two fronts, and although Obama has pledged to end US involvement in Iraq, there is a widely shared nervousness that America does not yet have either the military or the political toolbox at the ready to handle the blended chaos of Afghanistan and Pakistan.

Further afield, the rise of China - with its mix of authoritarian politics and turbocharged economic growth - is causing Americans to wonder whether the mantle of world leadership, which they have assumed was naturally theirs since the end of the Second World War, is slipping away.

The most determined of presidents, with the best team around him, finds it hard to get things done. America's political system is deliberately fragmented, with power shared between the states and the federal governments and, in Washington, between the executive and Congress.

The US constitution, 222 years old, is an admirable document but it is one that limits the ability of the President to be bold and decisive. For a generation, the US has been in one of those phases where the federal government was instinctively distrusted. The jury is still out on whether today's crisis is sufficiently grave - as it was when Franklin Roosevelt took office in 1933 - to reverse that trend, and give the President the running room and support he needs.

Overseas, too, Obama does not have a free hand. The worldwide interest in his election obscures the fact that many of the problems facing the world are not America's to solve. Obama can do little to help Europe come to a new modus vivendi with Russia, or sort out for China how it can (as it must, for all our sakes) marry economic growth to environmental sustainability.

I believe Obama will make an early priority of trying to find a durable peace between Israel and the Palestinians, not leave it until late in his term, as George W Bush and Clinton did. But he and his team know very well that even an involved US President cannot bring peace to those who do not want it themselves.

Yet with all the caveats, this is an extraordinary moment. Americans are a fortunate people, graced with an abundant continent, protected by two great oceans, sustained by resources of creativity and enterprise. This week, I think, the nation feels itself fortunate once again to have found a man and a team who can inspire and lead them through tough times.

But Obama and his men and women will need more than skill. At a party on Sunday, I saw one of his closest aides, a man I've known since he was a bright young spark in Bill Clinton's campaign years ago. I congratulated him on his new job, and wished him luck. He and his boss will need it. They deserve it, too.

* Michael Elliott is editor of Time International.

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