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I would like to know if deflation would represent a risk to Debt (bond) payments and Social Security benefits.

To my understanding, Social Security is only indexed when there is positive inflation. During deflation, Social Security benefits are not indexed down.

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    I wonder if this is better suited to economics.SE versus here? – dwizum Oct 17 at 18:00
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Deflation is a pretty destructive thing for an economy (I assume we're talking about prolonged, meaningful deflation not "hey, look, we actually had 0.2% deflation in April before inflation resumed in May and June"). The government balance sheet would be hurt a bit by entitlements like Social Security and interest rate payments rising in nominal dollars. But it would be hurt much more by rapidly declining tax payments due to the economy taking a serious downturn.

When you have real prolonged deflation, everyone knows that stuff is going to be cheaper tomorrow than it is today. That gives every consumer the incentive to delay purchases. That causes a systemic decrease in consumer demand which alone would be enough to cause a major recession. Companies see constant absolute dollar salaries getting nominally more expensive over time and falling consumer demand and have to, among other things, cut jobs. That further reduces demand and you get a destructive cycle. One of the issues for the government when you're in this sort of recession is that your tax collections are going to decline significantly. The government balance sheet would be hurt much more by the loss of taxes than by the increase in expenditures.

Of course, it is probably not possible for a country that controls its own money supply to have lasting deflation these days. Most economists will agree that the Fed should be able to ensure at least a bit of inflation simply by creating more money. That's not ideal but almost certainly less destructive than a period of real deflation.

  • Yes, prolonged (90+yrs) inflation good, deflation bad. – paulj Oct 18 at 17:08

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