For an understanding of how our world will look in this scenario I recommend reading Conquer The Crash: Second Edition, by Robert Prechter which was released in late 2009. I also recommend subscribing to his monthly investment newsletter: The Elliot Wave Theorist, which can be found at http://www.elliotwave.com/.
In Prechter's book he describes the investment classes that should be used under the deflation scenario. They are as follows:
1. Cash in safe banks
(Safe bank list provided and updated at www.Elliotwave.com)
2. Short Term (1-3 Month) Treasury Bill Funds
(Provided In Conquer the Crash)
3. Gold and Silver
(An depth discussion on Gold and Silver in Scenario 2 below)
What he does not recommend is holding money at cash equivalents such as:
*Money Market Funds
*"Cash Equivalent" Funds that hold municipal bonds and AAA corporate debt
*Unsafe banks
The reason for this is because if the Federal Reserve is not able to stop what is coming, then FDIC insured banks accounts, money market funds, state and local governments, and corporate debt may all fail or lose significant value.
4. Shorting The Stock Market
This last option, to short the market, means you are betting the stock market will fall and you will profit as they do. This is recommended for speculative funds only. In a market where the final endgame is going to be inflation, it is dangerous to hold a large portion of your investment capital short the market. (Inflation or hyperinflation can take the nominal value of stocks higher even if their true value is falling)
A fund that provides investors with a focus on specific stocks that are overvalued in the current secular bear market is The Prudent Bear Fund. (BEARX)
The fund also keeps a position in gold and gold mining companies, meaning you are essentially betting that stocks will fall and precious metals will rise.