US default on 17 Oct? Nah.

The market is fixated with and nervous about the idea that the US may default come 17 Oct, if the debt ceiling is not raised.

I disagree with this view, simply because the Fed can print more money and kick the can down the road, and because the government may decide to reduce spending on other programs and actually pay the interest incurred on the debt. 

If the US government do default, it is a deliberate choice. As of now, their total annual tax revenue is about 10 times more than the annual interest payment on their debt. So, they can pay the interest on the debt if they really want to. The problem is that they would have to cut spendings on other areas and infuriate a lot of American voters. If this persists, we will see the type of riots on the streets that is happening in Europe right now.

Enter the Fed. The Fed will use the excuse that the economy is not growing up to their expectation yet (for the record, they've been wrong in every single forecast in the past decade... and by a large margin), and that inflation is still low enough (of course it is not low). In fact, the likelihood that the Fed will increase the size of the QE is much greater than the likelihood of the US defaulting on Oct 17. The Fed will print money to bankroll the government further. Janet Yellen is likely to be appointed as the next Fed chairman. They're all the same - advocates of money-printing.

What we're seeing now is political-brinkmanship in the US government. The Democrats think that they have pushed the Republicans into a corner and force them to eventually drop any attempt to defund the (unlawful and very wasteful) Obamacare. The Republicans are hoping that the citizens will come to realise that it is Obama and the Democrats who do not want to negotiate with them and that they're the ones responsible for the government-shutdown debacle. In fact, the Republicans have sent many bills to Senate Majority Leader Harry Reid to reopen certain parts of government, but he refused to entertain them.

This debt-ceiling issue is a charade. Obama is lying when he says that raising the ceiling will not cost taxpayers a single cent and that the US has never defaulted and that the US always pays its bills. What he doesn't mention is that it is precisely because the government doesn't pay its bill that it has to raise the debt ceiling so that it can borrow more money from the same lenders to repay their existing debts. The self-imposed-but-never-observed debt ceiling is not the problem. The real problem will come when lenders impose a lending ceiling, as Peter Schiff likes to say.

This is just another political game. Almost the entire market were expecting the Fed to taper last month, but were caught by surprise when the Fed did not do it. Eventually, the market should realise that this is all about keeping interest rates low for government bonds and large financial institutions that hold toxic bonds and mortgages. It has got less to do with the real economy.

The situation in US is very unstable now, as I've been warning for the past 4 years. The government bubble is too big and it will find a pin to prick it rather soon. The world is slowly moving away from using USD as the main reserve currency, and there will come a time when people panic and dump USD and US debt in droves. Don't get me wrong. The US is still the world's largest economy and it will not fall off the cliff tomorrow morning. It is, however, in a decline relative to the other parts of the world and investors should position themselves accordingly.