The Law of Large Numbers and the Debt Cycle

When people have confidence in the future, employment is high and global conditions are good, people will normally take on more debt. Once this debt level gets a little bit too high and people need to start focusing on making repayments rather than buying more stuff, their consumption and investment will fall - reducing output. The role of governments in this cycle is to try as much as possible to do the opposite of what consumers and businesses are doing. When they're taking on lots of debt to boost consumption and investment, governments should tax more and spend less so things don't get too crazy. This is called countercyclical fiscal policy.