Let's face the facts about the inflation/deflation debate:
1 - No one really knows or can possibly know what the "endgame" will be ...
2 - The goal for investors is to be "future independent" as much as possible: a strategy that wins in nearly any market.
Consider the real issues facing the authorities right now:
1 - If they allow significant price deflation banks could fail in great numbers, and then they may be forced to really monetize which could ignite hyperinflation
2 - If they push in significant price inflation, the currency will collapse, and they may be forced to really deflate to bring back confidence (the "austerity" plans)
In sum, the Fed is facing a cliff on both sides of the path. They will try and stay in the middle.
That means the Fed will end up oscillating policy between price inflation and deflation with a bias toward whichever risk (U.S. government creditors or the banking system) they perceive as the greater.
Now consider the dollar. It is bad, except:
1 - Everyone else is in real trouble and in more trouble than the U.S. !
2 - The Euro is the only substitute in tradeable size against the dollar, and Europe is in real trouble!
The financial elite hold far more wealth in financial dollar assets than they possibly can hold in real goods. How are they going to hedge the risk that things might get out of hand if the dollar "must" devalue?
Let's get a quick answer.
You might note that savvy market players, with the help of the central banks, can push markets to extremes and this helps the nimble set up to benefit from the other side (sell high, buy low).
Consider the fact that, in 1998, the real estate tax exclusion was quietly passed and the Fed subsequently allowed huge increases in mortgage credit.
Now, what is the one market, that recently was busted, that can take the kind of money flows that the big boys have stored in financial assets? After all we are talking trillions ...
In other words, the big boys can prepare for the risk of devaluation by buying cheap real estate and stocks of banks "that will survive" at near dirt cheap prices. This offsets the risk that things get out of hand (necessitating rapid price inflation) before (if) a global currency is introduced. If a solid global currency is introduced, then, in my view, the dollar is really toast.
So how to invest?
1 - Buy gold. It will benefit from a collapse in assets and from devaluation. Note that the dollar price of gold has almost nothing to do with "price inflation" and "price deflation" (convince yourself of this by noting the huge fall in the price as inflation continued for decades). It is more sensitive to whether there is a solid foundation under dollar assets - and the foundation can be broken by either a higher risk of price inflation or price deflation.
2 - Hold cash.
3 - Determine when your income is (1) price inflation advantaged or (2) price inflation disadvantaged or (3) price deflation advantaged or (4) price deflation disadvantaged.
For earners in industries that are doing well in price inflation and price deflation, hold medium amounts of real estate debt. Since income tends to hold steady, price deflation means other expenses drop and the debt is affordable; if there's price inflation there's an increase in income allowing a real return. This can take the place of some gold investment.
For any other combination, lean toward more cash, severely limit use of debt, build up a cushion, gain alternative income sources, and put some money in gold or alternatives like gold that are not someone's liability. While you may decide to bet on one side of the market, the premise here is that it is difficult to know the outcome.
4 - Keep in mind that the authorities face real trouble with both price inflation and price deflation, so they may administer "survival" (they already have) and let some financial institutions fail which will curtail the price inflation effects when giving out lifelines financed with printed money.
5 - Remember, the purpose of the Fed is to benefit the banks and elite finance. They do that by providing a market for treasuries so that Congress can overspend. But now that the Fed can issue it's own perpetual debt (paying interest on reserves!) the next step is to insulate themselves from U.S. government control and U.S. government insolvency.
6 - Remember, the most logical outcome is oscillation of price inflation and price deflation. When one seems to be reigning, operate with the other side in mind. In other words, during high and slowing inflation (indicating a peak), accumulate cash invested in shorter term assets in preparation for price disinflation. During price deflation, pick up bargains. Worst case, you will likely do better than those that believe the trend will be in one direction.
Good luck investing.
Disclosure: Author holds a position in Gold ETFs.