The small window of economic prosperity

I claim the current economy must fit within a small window of economic parameters to be sustainable. That window is reasonably low unemployment (say, <10% or so) and reasonably low inflation (say, between -2 and +10%) . Also, severe downturns in the stock market (such as the 40% drop this month) may make this window even smaller. If we fall outside this window we run the risk of a major systemic meltdown, and I hope and expect the financial centers are mindful of this problem. Here's my reasoning:

Fixed pensions are part of the economy. Social security is the biggest, but all manner of private and public pensions also fit within this system. These pensions require either taxes (for government fixed pensions) or investment growth (for private pensions and, for that matter, for endowment-based funding). If the stock market tanks that reduces government revenues for lack of capital gains taxes. California got hit very hard by this in 2001 when the flow of dot com cap gains stopped cold. Similarly, declining housing prices hurt city coffers hard.

But cap gains taxes are chump change. The real money is in income tax. As unemployment rises it eventually reaches a point where wages are depressed. Then income tax revenue gets a double whammy: fewer people making lower salaries. That puts a severe strain on either federal or state government budgets. Ordinarily, this running deficit may not be catastrophic, but the effect is unknown when major deficits are tacked on to the nation's $10 trillion debt.
If we're already running $600 billion yearly deficits and the budget balloons to $1.2 trillion yearly deficits, something's got to give. Bankrupt pension plans ensue triggering downstream problems.

A similar problem ensues with deflation (i.e. negative inflation). It's simply hard to fill the pension and general tax coffers which is problematic when servicing $10 trillion in debt.

Let's look at a different scenario. Say inflation runs hot: 10% a year for several years. This scenario is by no means pessimistic. Then the pensioners are squeezed however. Within 7 years real values are cut in half. Again, pensioners can't survive.

Essentially, our economy is built on an assumption of modest inflation and unemployment.