Well, the veil has been lifted, and we're definitely going to suffer one of two scenarios in terms of consumer and producer prices. We're either going to see inflation or deflation.

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How's that for covering all my bases? I was hoping the Fed would offer a little more clarity or decisiveness as to its future plans on Tuesday. No such luck. Bernanke decided to convert some of mortgage securities into cash to buy government securities on a small scale, with the end goal of pushing long-term rates (and mortgage rates) slightly lower.

"Some", "small scale", and "slightly"? Wow - hold onto your hat.

Frankly, it sounds like he knows the economy is walking a tight rope between inflation and deflation, even if mostly a mental one. For the foreseeable future though, the deflation crowd may get their way, even if it's a self-fulfilling prophecy. (If deflation and inflation are opposite polls of monetary policy, how come we put up with one but fear the other? Check out Why Prices Never Really Go Down.)

The Pro-Deflation Argument
If you're PIMCO's Scott Maher though, you see a huge risk of deflation regardless of what the Fed can do - which isn't much - to tweak the economic balance at this point in time. Maher points out that the current crisis in the U.S. is looking eerily like the one Japan entered in the '90s - swelling debt that couldn't be serviced because incomes fell and never really recovered.

Not that there aren't counter-arguments to the possibility, but if you think the U.S. is in the same rut Japan was in then, it may be time to rework your portfolios for deflation protection. Here's a starter set for you, and the rationale behind it.

Deflation Defense Picks
First, consider Stryker Corp. (NYSE:SYK), or most cash-heavy medical equipment makers. Ethical or not, medical equipment makers retain their pricing power pretty well regardless of the market. Add in the fact that the FDA is likely to shorten the process for medical device approval, and things are looking up for Stryker and its peers.

The other reason SYK is looking juicy is the significant amount of cash and near-cash items it has sitting on its books. Cash is king for everyone when inflation strikes - even medical equipment stocks.

Next, take a look at Cognizant Tech. Solutions (Nasdaq:CTSH). Technology is to business what health care is to individuals, for the most part. Personal electronics may struggle when times are tough, but business technology services like the ones Cognizant offers are effectively deflation-proof. How else do you think Cognizant made more money in 2008 than in 2007, and more in 2009 than it did in 2008?

U.S. Treasuries, or the easier way to go, the iShares 7-10 Year Treasury Bond Fund (NYSE:IEF) are next on the list. Even if the yield is low, it's reliable, and beats the prospect of nothing. Better still, a 2% yield on a treasury when inflation is 1% to the negative (true deflation, or price declines), it's like earning 3%. Plus, when deflation gets into full swing, yields usually sink, which means bond prices (or the ETF price) scoot upward.

As a consumer staple name Unilever NV (NYSE:UN) is a painfully obvious play. But Unilever also offers additional qualities aside from being "safe" in a rocky environment. The 3.3% dividend yield is not only protected due to the raw nature of Unilever's business, but also because Unilever isn't apt to be operating in the same deflationary environment that U.S.-based companies are.

The risk to watch out for is a rampantly-strengthening dollar hurting your effective yield. However, that's a distant worry right now.

The Bottom Line
Barring a complete implosion of the global economy thanks to deflation in the U.S., there are ways to survive and even thrive if deflation kicks in. Any deflation will be a headache, but ultimately limited and eventually replaced by the inflation that's been brewing for months. Rates are just too low, and there are too many cheap dollars floating around.

Deflation is likely to be a temporary, even if lingering and trade-worthy, phenomenon. (For related reading, take a look at The Upside of Deflation.)

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