Busch: G20 All Talk No Action
Over the weekend, the G20 came to a non-agreement, agreement that stipulates little and does less. My favorite comment comes from Canadian Finance Minister Jim Flaherty who said, "G20 deal is not good enough for imbalances."
The currency markets were not fooled and promptly sold the US dollar against Far East currencies including putting in a new low against the Japanese Yen. The driving theme for the markets remains a lower US dollar via QE2 for floating currency countries and higher current account imbalances for managed currency countries.
Here are the major points from the G20 finance minister communiqué:
- Pursue structural reforms to boost and sustain global demand, foster job creation and increase growth potential;
- Complete financial repair and regulatory reforms without delay;
- In advanced countries, formulate and implement clear, credible, ambitious and growth-friendly medium-term fiscal consolidation plans in line with the Toronto Summit commitments, differentiated according to national circumstances. We are mindful of the risks of synchronized adjustment on the global recovery and of the risks that failure to implement consolidation, where immediately necessary, would undermine confidence and growth;
- Continue with monetary policy which is appropriate to achieve price stability and thereby contributes to the recovery;
- Move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies. Advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates. These actions will help mitigate the risk of excessive volatility in capital flows facing some emerging countries. Together, we will reinvigorate our efforts to promote a stable and well-functioning international monetary system and call on the IMF to deepen its work in these areas. We welcome the IMF's work to conduct spillover assessments of the wider impact of systemic economies' policies;
- Continue to resist all forms of protectionist measures and seek to make significant progress to further reduce barriers to trade; and
- Strengthen multilateral cooperation to promote external sustainability and pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels. Persistently large imbalances, assessed against indicative guidelines to be agreed, would warrant an assessment of their nature and the root causes of impediments to adjustment as part of the Mutual Assessment Process, recognizing the need to take into account national or regional circumstances, including large commodity producers. To support our efforts toward meeting these commitments, we call on the IMF to provide an assessment as part of the MAP on the progress toward external sustainability and the consistency of fiscal, monetary, financial sector, structural, exchange rate and other policies.
As one can see, Mr. Flaherty's comments reflect the elusive nature getting the G20 to take concrete steps necessary to change the global financial structure to reduce current account imbalances. The solution is simple as US consumers need to spend less and save more; Chinese consumers need to save less and spend more.
While it's easy for both countries to say this to each other, it is far more difficult to implement without action.
The US could lead by several steps that are within their current policy tools.
The US could finalize free trade agreements already being worked on and start with South Korea. The US could free up technology exports to China to improve the trade imbalance. Finally, the US could announce a new tax free account that has cap large enough to incent savers to accumulate money and provide new pools for domestic investment. Some have suggested that the Federal Reserve could state that they will not pursue a quantitative easing program that would devalue the US dollar.
The point is to lead by example and there are numerous policy alternatives available to do it.
It would be a far different conversation to have with China and the rest of the G20 if the US was operating from a position of strength. Sadly, this is an election year and the United States is not currently interested in this approach. This translates into feeble non-agreements with words like "pursue", "formulate", and "foster" to drive policy. This language appears to be a face saving exercise rather than an international agreement for action.
This translates into unilateral answers to deal with the devaluing US dollar via higher foreign investment taxes to enacting tariffs. The current account imbalances continue to balloon. The G20 built up expectations and then didn't meet them. The currency markets will continue to sell US dollars until this changes.
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.