Busch: G20 Tower of Babel

Today, the driving force of geo-economics is unemployment.

We must view all actions by economic and political leaders as an attempt to aid their individual countries through this prism. In the developed world, the drive for jobs has the unique twist of a fiscal austerity hurdle that places greater emphasis on monetary and currency assistance. This is the state of play as finance ministers meet in South Korea.

Today, US Treasury Secretary Tim Geithner has put forward a proposal aimed as addressing the build up in massive imbalances driven by currency management and domestic economic policies.

Sec. Geithner sent a letter to the G20 requesting that, "G-20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP over the next few years, recognizing that some exceptions may be required for countries that are structurally large exporters of raw materials." Sec. Geithner wants deficit countries to save more, surplus countries to stop undervaluing their currencies and the IMF to act as referee on the current account target of 4%.

Treasury Secretary Timothy Geithner
Treasury Secretary Timothy Geithner

What Geithner is attempting to do is to remove specific arguments over specific currency programs and to objectively study the outcome of those programs via the size of the current account balance.

While Canada and Australia endorsed the concept, Japan came out against it. Every country has an individual view towards the necessity of current account and trade imbalances for economic growth.

It's this Tower Of Babel optic that creates rigid stances towards any proposal. This is also complicated by the slow growth developed market countries versus the fast growth emerging market countries. Everyone wants to increase exports to drive growth and employment. In a free floating currency regime, we would see a rebalancing of trade and capital flows via a normal currency revaluation of stronger growth countries. This is not happening.

China is managing their currency to allow a slow appreciation. In turn, any emerging market nation that has a current account surplus has to decide if it will allow it's currency to appreciate or follow the Chinese by slowing the ascent to remain competitive with the Chinese. This further inflates global imbalances.

The United States is engaging in a de facto currency devaluation via the Federal Reserve. It should surprise no one that the US dollar began this path after the FOMC voted to engage in quantitative easing in March 2009. It should surprise no one that the US dollar rallied when the FOMC completed this program in the spring of 2010 (and we had a European sovereign debt crisis). It should surprise no one that when NY Federal Reserve president William Dudley described a renewal of quantitative easing that the US dollar began another sharp sell off. We now await the November 3rd FOMC meeting to see exactly what the size of the program will be.

Essentially, both China and the United States are engaged in polices that are driving the size and scope of the global imbalances. The Geithner proposal carries no enforcement mechanism nor does it carry any agreement. While the G20 members understand each other's positions, they unfortunately share a Babel-like economic view. More than ever, the construction of an integrated global financial and structure is at risk of having the economic recovery work stopped.

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.