Have we reached debt saturation point?

In the town where I live I've noticed an acceleration in the closure of retail shops, and I live in a fairly affluent area. Perhaps one in 10 shops is now shuttered since they have gone out of business or closed operations. Half of these shops are small businesses, the other half large businesses that have closed down or decided to cut back their operations. People are simply choosing to spend less as the cost of essentials increases, the cost of debt increases and their monthly expenses are already maxed out.

I know numerous people who are downsizing, they are choosing to lease smaller less expensive cars, they are spending less and cancelling various memberships and they are attempting to minimise their debt. This is certainly the sensible thing to do, but the truth is, most of them were already at debt saturation point and so they were left with no choice. They will be no better off during an economic collapse just because they have downsized a bit. If any one of them lost their income they would still be in deep trouble. I'm burning through savings now as I struggle to start a new business and even on minimum expenses it's amazing how quickly that money goes. If you think that you've got 3 months of emergency funds put away in case you lose your job, think again. It's probably closer to 2 months once you've accounted for unforeseen bills, inflation and the unexpected cost of essentials. I know from experience that I won't be able to survive on my minimal estimated expenses for as long as I thought, and I've always been very careful with money and avoided debt. What about the people who were less careful? They probably have very optimistic views on how little money they need to survive on. Basic life is more expensive than most people anticipate.

House prices are now so high in the UK that, to afford to purchase a house, people need to stretch themselves to the limit of the debt they can afford. Mortgages used to be agreed on the basis of 3 times your salary. Now it seems that banks are agreeing mortgages for 5 times, sometimes even more, a persons salary. In the immediate term this might seem affordable because interest rates are historically low, but what about when interest rates rise? If they are already on the limit of affordability what will they do? They will spend less on entertainment, clothes and other things that they don't need. Instead they will focus their financial energy on things that they need such as food, heat and other essentials. This will have a knock on effect on the leisure and luxury economy, which has been supported by debt for many years.

Government debt is resulting in cost cutting across the board. Deficits continue to grow (note - a deficit is the amount of annual outgoings that exceeds income). Ever growing deficits mean that the total debt grows annually so the following years deficit must be bigger still to cover the cost of debt. With government cost cutting reaching critical levels, government departments being unable to function effectively and public services failing, it seems that government debt has reached the point where it will become exponentially worse, resulting in total failure. They cannot cut back any further and they cannot afford to take on much more debt.

Corporate debt has also reached record levels, with corrupt directors saddling companies with debt to fund share buy backs. OK so the shareholders (including the very directors who benefit to the tune of millions) will win in the short term, but in the medium term many of these corporations will not survive or they will be servicing huge debts for many years to come. This will damage their operations as they will not have enough money to invest in innovation and R&D. Their share prices will fall as new entrants are able to innovate and take away market share and finally they will go bust. All for a bit of short term profit taking. Personally, I would not be investing any money in any organisation that is undertaking debt for share buy backs. They are dead in the water in my opinion.

So, the question is; Have we reached debt saturation point? Have we finally reached the point where no more debt can be taken on my individuals, corporations and governments without a total collapse in affordability. It's a catch 22 situation. Debt is needed to fund day to day activities, but more debt results in higher costs, resulting in even more debt required to fund day to day activities. This is the point that we have reached and the only way forward from here is a total collapse in the debt market and related assets.

For those of you who have prepared and are ready for the collapse, don't distract yourselves with thoughts of material riches as you are able to mop up under priced houses, cars and other useless chattels. As we emerge from the next debt crisis we will live in a very different world. Conspicuous consumption and wastefulness will be as socially unacceptable as stealing is now. As a wealthy individual on the other side, your resources will be needed to rebuild businesses and societies that will have a positive on the world. Businesses based on ethics, ecology and new technology will thrive in the future. This doesn't mean that you won't enjoy the freedom that wealth brings, it just means that you will spend it in more rewarding ways.

For disclosure, I'm not a professional advisor and this is not investment advice, merely my own observations of the market and indexes, so do your own research.