It is now one month later; long-term rates have gone up sharply and the dollar is strengthening.
The central bank's Federal Open Market Committee met this week and decided not to change course -- maintaining its plan to buy $600 billion in longer-term Treasury securities.
The path chosen by the Fed raises some serious issues. After all, one of the main arguments in favor of QEII is that the economy would gain strength from a boost in U.S. exports as a result of a weakened dollar making domestic goods cheaper relative to foreign competitors.
This strategy might have worked in the 1950s, but now? It will mostly likely result in America's cost of living increasing. Here's why.
America does not make too many products here. Manufacturing once made up 40 percent of the U.S. economy; it currently makes up 12 percent of real gross domestic product.
Consequently, trying to boost U.S. exports by lowering the value of the dollar will not result in an improved U.S. economy. The share of the economy made up by manufacturing is too small.
In contrast, in a country like Germany -- whose economy is built primarily on domestic manufacturing companies -- this would certainly be the case. When the euro fell against other currencies in the second quarter of 2010, German goods became cheaper and demand increased, which in turn stoked German economic activity.
Another prime example of a country where this policy works is China. The currency-devaluation policy has been beneficial to China, as evidenced by the fact that its manufacturing sector, which is more than 50 percent of its real GDP, has been growing steadily, increasing by a whole 2 percent from August to September.
In the end, devaluing the dollar will only serve to benefit U.S.-based multinational corporations that sell goods and services abroad.
The exchange rate would generate increased profits on the parent's bottom line, but these profits would have limited impact on the domestic economy. Jobs would not increase, as the majority of U.S. multinationals have offshored their production to reduce costs.
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In addition, tax laws prevent domestic reinvestment of profits made abroad, so the extra money wouldn't be pumped back into the U.S., it would stay abroad. Does anyone really believe that General Electric, IBM, General Motors, Ford, Microsoft or other U.S. giants that spent the last decade offshoring jobs and plants are suddenly going to close these facilities and bring them back to the U.S.?So what we're left with will be higher interest rates, higher inflation and little gain from increased exports.
In the end, I wonder how many of Chairman Bernanke's products are actually made in the USA?
Richard D. Soultanian is co-president of NUS Consulting, a global energy management firm.