The Eurozone's problems are worse than a question of creditor-debtor imbalances and worse than the US-China issue. This aspect of the crisis was raised in Stephen King's article in The Independent news online portal (Now opened, the door to exit eurozone can no longer be shut).

Looking from the Far East and having spent years growing up in Europe, it is so clear to me that the Euro politicians are fighting to achieve the European superstate goal with a flawed currency union. The next step is fiscal union and that implies a finance minister as well as leader stamping out every form of democratic or sovereign right of the 17 member countries.

In other words, the creditors forgive your debts in exchange for political dominion. Eurozone is the prototype for the one world government. A break-up will do everyone good for the long term.

The Fallacy of Composition and the Predicament of Debt

The Keynesians and monetarist economists are wrong in trying to stimulate consumption during downturns by fiscal spending and lowering interest rates. Deleveraging is bad in short term but good for the long term as the increased household and corporate savings is channeled into investments in nation's real capital stock, not into unproductive real estate or financial sector. The only productive government spending is in infrastructure (e.g. Indonesia) not in bailing out banks, corporations and households.

Macro economists and investment strategists should monitor the trend in savings for households and overall savings trend for the economy - especially for developed economies. A rising savings/income ratio means consumption/income will automatically fall (Disposable Income = C + S) but eventually build a base for higher domestic investment (e.g. the US where household savings ratio has improved but unless government deleverages and withdraws the fiscal stimulus of sustaining a budget deficit, households will have little incentive to increase savings further in an environment of artificially low yielding savings deposits).

The asset-based wealth effect through elevated property markets (China, Spore, Malaysia) may also play a role in encouraging households to increase debt levels but this is also not productive for the economy. Countries with loan/deposit ratios below 100% and manageable inflation (e.g. Malaysia) may have more room to grow but the leverage should be driven by well managed corporates rather than households.

Democracy and the Wealth of Nations: A Simple Question of Values

The study of economics today fails to attribute the catalysts of economic development to a crucial combination of human qualities that nurtures a conducive ecosystem for prosperity. What is it that has caused certain peoples in a country to work hard, save and be endowed with entrepreneurial talent? To answer this, we need to look into the psychological mindset and expectations of individuals.

The Individual or the State?

Economists have attributed the rise of modern capitalism to several factors such as the market economy, the utilitarian values of the 19th century or the Protestant ethic. However, they fail to see that behind every burst of economic activity and every technological innovation, is a radical change in the mindset of society. This change is a shift in the social perspective from a culture that puts society’s interest above the well-being of the individual to one that puts the individual’s well-being above that of society.

Which is more important? The individual or the state? Does society exist to serve the individual or does the individual exist to serve society, nation, community or government? The answer is simple: if the individual’s life is finite and death is the ultimate end of the individual, then society and civilization is more important because it will easily outlast human lives. However, if the individual’s soul is eternal, then it is infinitely more important than society, which should rightfully exist to serve man. And this is the foundation of every democratic constitution.

The rise of American capitalism stemmed from a personal strong conviction that all men are born equal and each individual can and should be given equal opportunity to raise his/her economic and social circumstance.

At its best, the free market economy facilitates the individual spirit of enterprise and innovation. At its worst, individualism does lead to a hedonistic society where the rich indulge in ostentatious or unproductive lifestyles while the struggling middle class compete to keep up with their neighbours and peers.

But how do we explain the economic dynamism of Asian countries like China and India where the individual is considered as subservient to society? Social scientists from the West are prone to make the mistake of viewing Asians as placing the community’s interest above the individual’s interest. On the contrary, the typical Asian views the family as an individual unit and upholds the well-being and rights of the family above that of the state/society.

If this were not the case, then Communist China’s transformation into a market economy would not be possible. The economic and social revolution of modern China boils down to many factors but one of the crucial catalysts is this change in the mindset of the people that they can work to improve their economic status. In other words, the well-being of the family (i.e. individual) is as important (officially) if not more important (in practice) than the objectives of the Communist state.

China’s adoption of the free market economy paved the way for the individual family to assert its rights to economic and social progress.

(The gradual opening of the Chinese economy under Deng Hsiao Peng - who was quoted to have said it does not matter whether a cat is black or white as long as it catches mice - in the 1990s paved the way for China to join the World Trade Organisation in December 2001. That landmark event further opened up trade opportunities and helped the country to solidify China's position as a cost-competitive factory for the world.)

China's Increasing Impact on Global GDP

In the past six years, the Chinese economy has started to have a material impact on global GDP growth. Over the 2004-2010 period, China's GDP correlation with global GDP correlation has improved with the R Square rising to 40% from 14% in the 2000-2004 period and 1% in the 1980-2000 period.

While the U.S. and European economies, which together account for half of global GDP remains the biggest drivers of the global economy, China's impact on growth is getting larger over recent years.

Being the second largest economy in the world, one would have thought that China's correlation with global GDP would have been higher. But the rebound in the U.S. and G7 economies from the recession of 2009 has pulled up global GDP by a bigger swing than the rebound in China, which is estimated to have grown by 10% in 2010 versus 9.2% in 2009.