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Defensive stocks, cash-heavy balance sheets and low debt levels are all very nice during economic downturns. But what's the best way to ride out an economic depression?

While the question might sound alarmist, more and more people are weighing the possibility that the economic slowdown engulfing the world right now could turn particularly nasty in the months ahead – that is, if various rescue attempts fail to support the wobbling financial system.

According to Intrade, the online predictions market, investors now believe there is an 80-per-cent chance that the U.S. economy will fall into recession in 2009. Another 15 per cent believe that a depression – defined as a total decline in gross domestic product of more than 10 per cent over four consecutive quarters – is in the works for next year.

Meanwhile, Nouriel Roubini, an economics professor at New York University – and one of the scariest forecasters making headlines these days – suggested yesterday that central banks would have to cut their respective key interest rates by 1.5 percentage points to head off a financial disaster, and the consequences could last a decade.

“It will take a significant change in leadership of economic policy and very radical, co-ordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster,” Mr. Roubini said in a note.

In other words, depression – or a severe recession, if you prefer that term – is becoming a very real possibility. Are you prepared?

It's actually pretty easy to get prepared. According to the historical data for what worked best during the Great Depression of the 1930s, long-term U.S. Treasury bonds were the place to be. They were safe, relatively stable and gave investors regular income at a time when they most needed it.

Chances are, this is still a good bet to ride out any dark days ahead – as long as you are aware this is still not a risk-free investment. The current yield on the 10-year U.S. Treasury bond is less than 3.8 per cent, on the low end of its historical trend. That means distributions are low. It also means bond prices are high, since bond yields and bond prices move in opposite directions; a correction in bond prices would lead to capital losses.

The other risk with U.S. Treasuries is that they expose Canadian investors to currency fluctuations. If the U.S. dollar plunges, the bonds will be worth less when converted into Canadian dollars – which makes Government of Canada bonds another worthwhile bet.

But here's the good news: The opposite is happening. The slide in the Canadian dollar, down about 8 cents (U.S.) in the past week alone, suggests that the U.S. dollar is still a haven during troubled times – which means that U.S. Treasuries should give you more bang for your buck if commodities continue to get hammered and the loonie falls further.

In the meantime, those who own U.S. bonds will sleep well.