How to prepare for deflation?

[kimchi]

Inflation is the current buzz-word with the falling $US, rising commodity prices and the prices of basic essentials.

There is one huge part of the economy (in the US) experiencing deflation: - property. The S&P/Case-Shiller home price index tracking 10 regions recently posted its steepest decline in 16 years - 4.5%, this contrasts with prices rising 20% year over year back in 2004.

The media and economists tend to worry about what has happened in the past. There are financial indicators which fade whatever appears on the front pages of national magazines and there is a case for fading predictions for continuing inflation.

As the gentlement on the politics forum so eloquently pointed out recently, my understanding of macroeconomics is probably fatefully flawed. I am therefore wondering how you would best position yourself to prepare for a deflationary environment.

If returns are related to risk, and a deflationary environment produces very low (or zero) returns, then maybe this would mean that risk is lower. Japan has been dipping in and out of deflation for the last decade or so and people have been depositing huge sums into their (soon to be privitised) postal service bank. Their rate of retun cannot be zero, but has often be close to it.

I've heard that in times of deflation, cash is king. But is this because the negative effects of inflation eating away at your savings become reversed, and so stuffing cash into your mattress becomes +EV? If the expectation of future prices is lower (eg- as in technology today) then there is a disincentive for people to spend their money, and thus save it.

So, whats the best way to prepare for a deflationary economic environement?