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This Is What Deflation Looks Like

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Yields on two-year Treasury notes reached a record low today, falling to 0.5767 percent, according to data from Bloomberg. This is what deflation looks like:

Meanwhile, in separate commentary, PIMCO's Paul McCulley pinpoints what the two-year note yield is saying this way:

"What the developed world faces is a cyclical deficiency of aggregate demand, the product of a liquidity trap and the paradox of thrift, in the context of headwinds borne of ongoing structural realignments. Front-loaded fiscal austerity would only add to that deflationary cocktail. And that’s what the market vigilantes are wrapped around the axle about: They are not fleeing the sovereign debt of fiat currency countries but rather fleeing risk assets, which depend on growth for valuation support. "

A cyclical deficiency in aggregate demand, the product of a liquidity trap and the paradox of thrift is simply a description of deflation. The only thing I would disagree with is the characterization of the deficiency of aggregate demand as cyclical. I believe it's structural, particularly on the consumer side, a product of the transition from peak positive social mood to negative social mood.

Consider two popular culture examples tied directly to consumer culture and the inducement of consumer demand for goods and services.

In 1982, Lowell "Bud" Paxson and Roy Speer launched the Home Shopping Club. Although seen only locally in Florida, this idea -- literally, a television network devoted to nothing but shopping, the display and accumulation of material goods -- expanded nationally in 1985, just in time to tap a consumer credit boom still in its infancy. About a month ago, HSN announced the addition of a second network, HSN2, which will primarily feature reruns of HSN programming along with some new "concept testing." My prediction is that this second network fail. The former consumer wave of consumption and 24-hour shopping is in the process of ending.

More recently, the A&E network launched the documentary TV series, Hoarders, ostensibly a real-life depiction of people battling against compulsive hoarding; ostensibly, because psychologically what this series depicts is the underlying mood of revolt against accumulation and consumption. Unsurprisingly, from a social mood standpoint, Hoarders debuted as the most-watched series premier in A&E history. Expect more programming from other networks to tackle, possibly even more directly, the popular revolt against accumulation and consumption.

One temporary beneficiary of the secular move to de-clutter and dis-accumulate (incidentally, a word I pulled straight from analysis of capital movements during the Great Depression related to what we are seeing today) is the self storage industry; companies that run self storage operations, such as the REIT Public Storage (PSA).

I checked out the Self Storage Association website and found the following article from the New York Times posted in the News section (NYT: An Abundance of Heirlooms). The article, written by Ellen Lupton, is about the steady accumulation of heirlooms -- after all, with Boomers having lived for much of their lives during the past two decades' consumption boom, that's a lot of crap... I mean "heirlooms" destined to be "passed down." Two critical elements in Lupton's analysis:

"You can’t buy an heirloom at Pottery Barn or Ikea. It comes via gift, bequest or a heated sibling brawl. But who’s to say you actually want this stale old stuff?"

First, the distinction made between immediate consumer goods -- those sold at Ikea or Pottery Barn -- versus those items handed down from generation to generation. Second, the more immediate question, Do we actually want this stale old stuff?

For now, it's true, we gotta store this stuff somewhere. Later, as this secular decline in accumulation gains force, we'll decide we can do without quite a bit of it... the storage units we use to keep it in, too.
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