Image: Anthony Mirhaydari

Anthony Mirhaydari

For all the well-paid analysts and sophisticated computer systems that dominate trading, Wall Street still can't seem to focus on more than one thing at a time.

For now, the focus has returned to the European debt crisis, as the issues that cut down Greece, Portugal and Ireland have hit Spain hard.

But very soon, as Election Day approaches, the attention will turn back to U.S. debt and deficit issues, which, as in Spain, are caused by too much debt and a government trying to avoid its budget-cutting duties. Remember last summer's debt-ceiling debacle and the market meltdown caused partly by the loss of the Treasury's AAA credit rating? Get ready for the sequel.

This time, however, Washington will have to contend not only with its new $16.4 trillion debt ceiling, but with the expiration of a long list of revenue measures (Bush tax cuts, payroll tax holiday and more) and automatic spending cuts that add up to a drag on growth of around 4% of the gross domestic product.

And unless something is done, it would all happen at once -- risking a new recession outright, since the International Monetary Fund is looking for the U.S. economy to expand by only 2.1% this year and 2.4% in 2013.

This is the "fiscal cliff" Federal Reserve Chairman Ben Bernanke has been warning about. It's real. It's coming. And soon, it will be all that Wall Street's chatterboxes are talking about.

No more can-kicking

The problem is that we can no longer avoid the hard fiscal choices we've been avoiding -- a topic I've written about frequently.

We needed meaningful stimulus to boost short-term growth and slash the "cyclical" portion of the deficit related to our mediocre recovery. Not only would more vigorous growth cut the deficit by increasing tax revenues and cutting expenditures on things like food stamps, Medicaid and unemployment benefits, it would also clear the way to address the deeper "structural" deficit.

This is the real crux of the problem. And there are no easy answers. What do we do about out-of-control health care costs? Or a bloated Pentagon budget? Or a share of tax revenue, as a percentage of GDP, that has returned to levels not seen in 60 years?

The problem is worsened by demographics. More older Americans and fewer young workers to support them will put additional strain on the federal budget. Any increase in interest rates if the Federal Reserve loses control of inflation will compound the problem via higher payments on existing debt. It's an untenable position.

The White House and Congress have had their chance over the last few years to thread this policy needle, mixing short-term stimulus with medium-term austerity and essential reforms. Instead, political bloodlust killed any chance of mindful bipartisanship. The recommendations of the Simpson-Bowles deficit commission were ignored, and the Congressional Joint Select Committee on Deficit Reduction -- the "supercommittee" -- simply failed to produce results.

A big part of the reason analysts at Standard & Poor's pulled our AAA rating back in August was our dysfunctional politics. Democrats and Republicans didn't address the issues. And they didn't merely kick the can down the road -- they held all of us hostage to 11th-hour brinkmanship as the debt ceiling approached to score points with far-left and the far-right extremists.

You see, after years of fiscal irresponsibility, we face an inescapable dilemma: We fly off the fiscal cliff, cutting the deficit by crushing the economy and, like Europe now, repeating the mistakes of the 1937 Great Depression double-dip; or we swerve, keep our tax cuts and benefits but watch in horror as a lingering deficit doubles the national debt over the next 10 years.

Economic research suggests both higher debt and deep short-term austerity limit economic growth. So we can pick our poison. You want the hurt now or later?

Total federal government debt © MSN Money

What's worse is that the choice must be made with a gun to the head. The chart above shows that we're fast approaching the new, raised debt ceiling.

A decision on all of these issues -- the deficit, the debt ceiling, tax cuts and unemployment benefits -- will need to be made in the context of a fierce, polarized presidential election, the lame-duck congressional session that will follow and an even-more-divided government in 2013. Prediction markets suggest President Barack Obama will win re-election and Republicans will hold the House and retake the Senate.