The easy steps have been taken

If there's a silver lining in all this, it's that since the budget fight broke out in 2011 Washington has enacted $2.7 trillion in budget savings over the next 10 years by picking the low-hanging fruit -- steps like rolling back the Bush tax cuts on the wealthy and freezing the pay of government workers.

But that's not enough. According to the Committee for Responsible Federal Budget, we've enacted only a little more than half the minimum deficit reduction needed over the next 10 years to stabilize the debt situation, about one-quarter of the reduction needed through 2040 and only one-sixth the reduction needed through 2080.

Long-Term Data Projections and Minimum Savings Needed, Source: Committee for a Responsible Federal BudgetSource: Committee for a Responsible Federal Budget

Overall, we need an additional $2.4 trillion in deficit reduction to merely stabilize the debt -- the "minimum path" shown above. Otherwise, if we follow the current trajectory, the debt is set to rise from 73% of GDP today to 130% by 2040 and to nearly 350% in 2080. Already, the debt totals nearly $53,000 for every man, woman and child in this country. What's your family's share? Think about it.

Now think about this: Any further reduction requires hard choices. Do we cut the mortgage interest deduction or do we cut food stamps? Do we mothball a few aircraft carriers or do we increase the Medicare eligibility age? Do we further close loopholes or raise taxes on the wealthy, or do we increase out-of-pocket costs for seniors?

Cheating death

Of course, Trekkies know that Kirk beat the Klingons and conquered the no-win Kobayashi Maru simulation by changing the rules of the game. Essentially, he cheated. (Search on Bing to learn more about the Kobayashi Maru test.)

Obama similarly needs to change the playing field. Instead of an either/or dichotomy, we need to find a third way out of this mess. Thankfully, the bipartisan team behind the Committee for a Responsible Federal Budget and Obama's 2010 Fiscal Commission have released a new, balanced road map out of this mess that doesn't blow up the economy or explode the debt. (Read it on the Moment of Truth Project website.)

It calls for lower tax rates but higher tax revenue via reform of deductions and credits. It calls for health care savings via cost sharing and means testing. It trims fat from the budget by tackling farm subsidies along with civilian and military health and retirement programs. And it changes the way the government accounts for inflation.

The hope is that by easing into this balanced plan, instead of accepting the sequester budget hatchet and suffering the political gamesmanship that will surely follow, the economy will be able to keep its head above water.

But Obama's task doesn't stop there. His to-do list includes boosting business confidence, aggressively tackling our infrastructure problems using private capital (see my column "Smarter ways to tap the rich"), and above all, embracing the idea of primum non nocere or "first, do no harm" by putting a moratorium on confidence-bashing ideas like a minimum wage hike, new energy regulation and Obamacare requirements for small businesses.

Unfortunately, given the tone in Washington, I'm not confident this needle will get threaded, so to speak. It certainly won't happen by Friday.

We do have a narrow window in which to find a way out of the overall budget mess. With Japan and Europe succumbing to new recessions, time is short.

Until I see signs that Obama "gets it" and pushes Congress and the country in this new direction, I maintain my bearish outlook on both the markets and the economy in 2013. For investors, that means focusing on defensive, beaten-down assets like Treasury bonds, the U.S. dollar and precious metals -- all of which have started perking up this week on new turmoil in the eurozone.

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In my Edge Letter Sample Portfolio, highlights include a near 30% gain in my short against Cliffs Natural Resources (CLF) and a 7% gain in the Direxion Daily 20+ Year Treasury Bull 3X (TMF) exchange-traded fund.

At the time of publication, Anthony Mirhaydari did not own or control shares of any company or fund mentioned in this column. He has recommended Direxion Daily 20+ Year Treasury 3X ETF to his clients.

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