Much has been made about the potential for “green shoots” or signs of new life in the broad economy.  Zero Hedge offers a unique perspective on the opportunity costs of these green shoots – what we are giving up in order to “manufacture” this emergence in economic activity…

The Opportunity Costs of Green Shoots

As we’ve been saying, it’s not the change in the trajectory of the global economy, but the cost of engineering it, that clouds the outlook. One example: the cash-for-clunkers program that drove German auto sales higher may cost German taxpayers at least $3.5 billion, even after the sales tax and foregone unemployment cost benefits. Such programs simply pull forward future demand, and displace other non-auto purchases. The world has never relied before on a coordinated avalanche of fiscal and monetary stimulus, and financial guarantees. I find investment commentary that hails the arrival of better data without acknowledging its potential costs to be incomplete.

The Ultimate Fighting division of heavyweight economists has been active, with Paul Krugman and Allan Meltzer exchanging sardonically-worded “history lessons” with each other. Here’s a chart I pulled together to try and grasp the fireworks. Today’s “output gap” (a theoretical measure of spare capacity) is around 2x the 1970s version. That should give the Fed ample room to keep monetary policy easy for a long time. But how easy? The expansion of the monetary base is already 4x greater than its 1970s counterpart, and heading higher. So far, the money multiplier (which drives inflation) has been weak, but the Fed is making a huge bet they can control all of this. The size of the monetary and fiscal expansion reminds me of that giant boulder at the beginning of “Raiders of the Lost Ark”; recent increases in commodity prices and Treasury/Agency yields suggest it may be gaining on us.

Read the entire article including remarks on residential real estate and the US dollar…