Economist Gary Shilling says we need to prepare for deflation, not inflation, and we need to do it now.

"You've got a strong supply of goods and weak demand,” Shilling told Business Week.

“That's a recipe for prolonged deflation.”

Moreover, Shilling fears that the U.S. government's economic tampering will have a "Big Brother effect," hurting innovation and permanently curbing growth.

How should investors proceed, then?

"Quality is paramount in deflationary markets," Shilling says. He thinks most investors should be in short-term certificates of deposit or money-market funds.

Investors with a 10-year time horizon should invest in technology, such as semiconductor stocks, Shilling says, because companies facing deflation can't cut prices and instead must boost productivity through technology.

Layoffs and downsizing continue in the United States and abroad.

A British Chambers of Commerce survey of 400 companies found that more than half of the firms surveyed plan to freeze pay this year while one in eight are planning to cut workers' pay.

The prospect of falling prices reflects the collapse of industrial production, the resulting high level of unemployment and the dramatic decline in commodity prices, according to Harvard economist Martin Feldstein.

Industrial production is falling at double-digit rates in the negative-inflation countries, Feldstein writes in New Age.

“Ironically, although central banks are focused on the problem of deflation, the more serious risk for the longer term is that inflation will rise rapidly as their economies recover and banks use the large volumes of recently accumulated reserves to create loans that expand spending and demand,” he says.