A U.S. default isn't a matter of "if" but "when," David Murrin, chief investment officer at Emergent Asset Management, told CNBC.

"It's inevitable that the U.S. will default—it's essentially an empire which is overextended and in decline—and that its financial system will go with it," he said.

The question is: Does the U.S. default when it is forced to by the outside world, probably the Chinese, or does it take the option to default on its own terms in such a way that it may have a strategic advantage, Murrin said.

Republicans and Democrats are currently locked in a debate on how to cut the U.S. budget deficit, and on whether the $14.3 trillion debt ceiling should be raised. Both parties need to come to a consensus by Aug. 2, otherwise the country will be in a state of technical default.

In his book "Breaking the Code of History," Murrin argues that the balance of power has shifted away from the West, with America as the superpower, towards the East, led by China.

He believes the U.S. cannot afford to compete with the rise of Eastern powers.

"It's very simple, its (America's) empire system, its financial system is in decline, we've seen very little growth for over a decade apart from financial engineering and leveraging, which ultimately caused the debt crisis of 2008," Murrin said.

He argues that emerging markets have a distinct advantage over more mature economies through demographics, working dynamics, and the ability to create fundamental economic growth. This imbalance inevitably pushes developed markets towards default.

"The only similar example is Britain. It was once an empire and when it lost its power over (the Suez Canal crisis of 1956) it had a large amount of loans outstanding to the Empire, and America owned most of that," Murrin said. "That was the power America had over Britain and it ended the pound, but their values were very similar in terms of global geo-politics and the world didn't really change that much."

He called America the last of the Christian, Western empires. "Who do you pass your values to as China grows and challenges? No one. So you are forced to continue to spend and one day you cannot afford it," Murrin added.

"If you look at how China is seeking to control debt in Europe and marginal debt in the U.S., which is strategic ownership, the position becomes more precarious for America," he said. "If I was an American in the White House, I'd feel safe militarily but fiscally I am very vulnerable."

"China is expanding its navy at a staggering rate, there is a whole naval arms race that is happening at a staggering rate and that will have ramifications within years," Murrin said. "It is a military dictatorship—look at the People's Liberation Army which really has control and it is very, very aggressive."

"We (in Europe) have tried to regain empire through Europe (through a) forced regionalization process which was bound to fail," he said. "The U.S.'s options are pretty dire and this is a real disaster but you can mitigate it."

The real disaster, Murrin said, would be to avoid recognizing the collapse of America's powerbase. "That only accelerates the loss of power and that creates a bigger vacuum, which China moves into and leads to potential conflict," he said.

For investors wondering where to look in this environment, Murrin said one thing is clear: "You probably shouldn't own dollar-denominated assets."

US Deficit Talks at Standstill as Default Draws Closer

Budget talks between President Barack Obama and his GOP rivals are at a frustrating standstill, leading a top Republican to launch a long-shot proposal to give Obama sweeping new powers to muscle through an increase in the government's debt limit without the approval of a bitterly divided Congress.

Lawmakers return to the White House Wednesday for their four negotiating session with the president in as many days. Obama has said the daily meetings will continue until a deal is reached.

A two-hour session Tuesday produced no progress after a day of poisonous exchanges between Democrats and Republicans.

Senate GOP cleader Mitch McConnell of Kentucky offered a backup plan that would, in effect, guarantee Obama requests for new government borrowing authority unless Congress musters veto-proof majorities to deny him. McConnell said he was forced to introduce the plan because he didn't see a path to an agreement so long as Democrats insist on revenue increases.

McConnell said Wednesday that his proposal was a "last resort if the president continues to shirk his duties to do something about our dire fiscal situation."

"Make the president show in black and white the specific cuts he claims to support. If he refuses he'll have to raise the debt ceiling on his own," McConnell said on the Senate floor. "But he's not going to get Republicans to go along with that."

McConnell's proposal immediately ran into stiff opposition among tea party conservatives and seemed unlikely to pass the House, but neither the White House nor House Speaker John Boehner, R-Ohio, dismissed it out of hand.

"I think everybody agrees there needs to be a backup plan if we can't come to an agreement," Boehner said in a Fox News Channel interview Tuesday afternoon. "And frankly, I think Mitch has done good work."

Under McConnell's proposal, Obama could request—and likely secure—increases of up to $2.5 trillion in the government's borrowing authority in three separate installments over the coming year as long as he simultaneously proposed spending cuts of greater size.

The debt limit increases would take effect unless blocked by Congress under special rules that would require speedy action—and even then Obama could exercise his authority to veto such legislation. But the president's spending would have no guarantee of receiving a vote.

"The American people elected (McConnell) to serve as a check on Obama's appetite for out-of-control spending, not to write him a blank check to continue the binge," said conservative activist Brett Bozell. "It's these sort of shenanigans that got Republicans thrown out of power in 2006."

Tea party favorite, Sen. Jim DeMint, R-S.C., asked about McConnell's plan Wednesday on CBS' "The Early Show," said, "Republicans weren't elected last November to make it easier to spend and borrow and add to our debt."

GOP presidential candidate Newt Gingrich wrote on Twitter, "McConnell's plan is an irresponsible surrender to big government, big deficits and continued overspending."

Republicans, meanwhile, continued pushing for a balanced budget amendment that would require Washington to balance its books. McConnell said politicians in Washington have showed they can't get the job done, and "If the president won't do something about the debt we'll go around him and take it to the American people."

McConnell made his proposal public a few hours before Obama presided Tuesday over his third meeting in as many days with congressional leaders searching for a way to avoid a default and possible financial crisis.

Democratic officials who participated in the session said Obama did not reject McConnell's idea, but said it's not his preferred approach. A statement issued later by press secretary Jay Carney said the president "continues to believe that our focus must remain on seizing this unique opportunity to come to agreement on significant, balanced deficit reduction."

McConnell's plan was hatched out of frustration that Congress and Obama are deadlocked as the clock ticks toward an Aug. 2 deadline for a market-rattling default on U.S. obligations.

McConnell said he still hoped a deal could be reached, but that a backup plan would show the markets and public that default is not an option.

Republicans are demanding $2 trillion-plus in budget cuts as the price for a commensurate increase in the government's ability to continue to borrow more than 40 cents of every dollar it spends.

Both Republicans and Obama see the politically toxic debt limit vote as a way to seize an opportunity to cut future deficits—a move that would seem to be to the political benefit of both sides.

But GOP refusals to consider devoting any new revenue from closing tax loopholes—like those enjoyed by oil and gas companies—to cutting the deficit has led Democrats to withhold further spending cuts beyond a handful tentatively agreed to during several weeks of talks led by Vice President Joe Biden in May and June.

For their part, Republicans say the White House is offering minuscule spending cuts in the near term and is pulling back from some tentative agreements on topics like requiring federal workers to contribute more to their pensions.

Staffers were meeting at the White House Wednesday morning to work out agreements on specific cuts discussed during those earlier Biden-led talks. The meeting with Obama, Biden and congressional leaders later Wednesday was expected to build on those discussions.

Obama himself upped the stakes Tuesday, telling CBS News anchor Scott Pelley that more than $20 billion in Social Security checks could be held up.

"I can't guarantee that the checks will go out Aug. 3 if we haven't resolved this," Obama said. "There may simply not be the money in the coffers to do it."

Economic activity weaker than expected

Bernanke and the divided Fed

The financial markets seem determined to interpret today’s statement by the Fed chairman in a dovish light, but a careful reading of his words does not support that point of view. True, Mr Bernanke outlined the possible ways in which monetary policy might be eased further if recent economic weakness should prove more persistent than expected. But he gave equal weight to the possibility that “the economy could evolve in a way that would warrant less-accommodative policy”.

There was no hint in the text about which of these outcomes he considered the more likely. We already knew from yesterday’s FOMC minutes for the June meeting that the committee is split about the likely evolution of policy, and we were waiting to see today whether the chairman would throw his weight behind either the doves or the hawks. He failed to do either.

Mr Bernanke’s description of the economic background was almost exactly the same as he offered after the June meeting. Economic activity was described as weaker than expected, and not all of that weakness was attributed to temporary factors. In his central view, growth would rebound in the second half of the year, but there was considerable emphasis on the continuing weakness of the labour market. Meanwhile, on inflation, some of the recent rise was also attributed to temporary factors, but the entire emphasis was on the headline rate, which he said had been running at over 4 per cent so far this year. There was no mention whatsoever of the much lower core inflation rate, a previous favourite of the chairman’s.

In other words, his overall message was that the economy might be undesirably weak, but that inflation was too high for the Fed to be able to respond to that weakness. That is the main point which we should all take from today’s evidence: no imminent change in policy is likely.

In the section on possible policy easing in the future, Mr Bernanke made it plain that this would only apply if economic weakness proved more persistent than expected, and if deflationary risks reemerged. Note that economic weakness alone would not be sufficient. That is the key difference, in his mind, between now and last year. This year, there is no deflationary threat, and therefore no reason to contemplate further unconventional easing. The Fed Chairman has now said this so many times that the markets might one day start to pay attention.

Nor did he necessarily promise a full dose of QE3, even if the economy should weaken further, and deflation risks should reemerge. His check list of possible easing measures included all of those he has mentioned before. But many of them would have very little effect. For example, with the markets already expecting the federal funds rate to stay at zero for most of next year, would it really make much difference if the Fed formally committed itself to hold rates at zero for a longer period? Would a cut in the rate paid by the Fed on reserve deposits held by the banks, from the current 25 basis points, really induce them to lend more? And would it matter much if the Fed increased the average maturity of its security holdings? On all counts, it seems very doubtful.

Why is the Fed chairman apparently so reluctant to take further measures to stimulate demand, when he views the outlook for unemployment with considerable pessimism? In the short term, the rise in inflation explains this, and it is hard to blame him for that. But, in the longer term, he may be having some doubts about the extent to which structural unemployment has risen. Certainly, the FOMC is now deeply split on this issue, and that constrains the chairman’s freedom for manoeuvre.

Until now, Mr Bernanke’s intellectual framework has been very consistent. High unemployment has, in his view, been due mainly to a shortage of aggregate demand. Furthermore, he has always believed that monetary policy is powerful enough to address this problem, even with interest rates at the zero bound. However, doubts appear to be creeping in.

Today, while he described the unemployment level as “a crisis”, he said that long term unemployment “leads to an erosion of skills…and impairs lifetime employment prospects and reduces the productive potential of our economy”. This implies that he is beginning to suspect that part of the rise in unemployment might be structural, and therefore outside the realm of monetary policy. An alternative point of view, which is that this makes it imperative to prevent long term unemployment from building up in the first place, does not appear to be on his agenda. (It is not clear, incidentally, why he believes this about structural unemployment, since the bulk of research done recently by labour market economists at the Fed points clearly in the opposite direction.)

He also said that his expectations of the employment effect of QE2 had been “relatively modest” at around 30,000 extra jobs per month. This suggests that, anyway, the scale of further QE which would be needed to make much of a dent in the unemployment problem is outside the bounds of what he deems feasible for the Fed in present circumstances. So he has lost some of his earlier confidence not only in the intellectual case for further action, but also in its feasibility and likely effectiveness.

The Fed is divided, and the chairman is not currently in the frame of mind to impose his earlier thinking on the FOMC. Maybe he is just biding his time. But the situation would have to worsen considerably before he takes more stimulative action.