PIMCO's Bill Gross buying U.S. Treasuries as protection against deflation

"There has been significant flattening on the long end of the curve," Gross told Bloomberg Radio. "This reflects the re-emergence of deflationary fears. The U.S. is at the center of de-levering as opposed to accelerating growth." Gross said he boosted the government-related bonds portion of the $177.5 billion Total Return Fund to 44% of assets from 25% in July.

Deflation -- a protracted, systematic decline in prices and wages -- occurs in pronounced recessions and other conditions in which demand is weak. Robbing companies of the ability to increase revenue, it handicaps the economy's ability to grow. If it takes hold, deflation can lead to the dreaded 'deflationary spiral,' in which price cuts lead to lower corporate revenue, prompting more lay-offs, leading to further consumer spending declines, prompting more price cuts, and so on.

Economic Analysis: If you agree that a 'new normal' exists, a new era -- one with increased government intervention, improved government regulation, and a smaller role for consumer spending in the U.S. economy, U.S. GDP growth with likely remain in the 2-3% range. Given the above, and absent an unforeseen international event that could send oil over $100 per barrel again, it's hard to envision runaway inflation. Hence, with tepid demand, the balance of risks is still tipped toward a deflationary scenario, rather than an inflationary one.

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Disclosure: Lazzaro owns shares in two Pimco Bond Funds: PHDAX and PYMAX.