Seven short steps to the cost of living doubling or more inside 3 years...

HYPERINFLATION is widely accepted as a period of out of control price rises, doubling the cost of living inside three years.

It occurs when a currency loses its ability to store value, encouraging long-term savings to pour into circulation where they swamp the much narrower supply of consumer money, and cause the whole lot to lose purchasing power.

There is no specific recipe, but the pattern we risk repeating today would be typical.

Step #1: Savers, already aware of very real inflation in the cost of living, find it applies more and more to their non-discretionary purchases, such as food and energy;

Step #2: They become increasingly irritated that their currency assets earn interest at the very low official rates - typically less than 1% in the West. To beat this, they need to take big risks by lending to minor institutions. These are the smaller banks which are insignificant enough to be allowed to fail, and therefore do not get access to cheap central-bank money. They are the institutions which have to bid market rate to get depositors' money. And of course, they will eventually fail, because they are competing in the loans market against megabanks with unfairly cheap money and a government guarantee to protect them;

Step #3: Savers also begin to understand that the government cannot adjust to higher rates because its own enormous borrowing costs forbid it;

Step #4: Savers then cash in their deposits and steadily sell/redeem their bonds, anticipating that bonds in general will repeat their 1970s' performance, shedding value continually over the medium to long term. (By 1980 the bond market was a shriveled rump, and it didn't re-appear until 1986, when inflation was well under control.)

Step #5: Central banks will collect the unwanted bonds (quantitative easing programs have so far collected nearly $1 trillion) and create new cash to pay the sellers - again, large and favored client banks;

Step #6: Savers now re-invest, carefully avoiding things which will repay them nominal dollars (i.e. deposits and bonds). Everything else will go up in price as the new Fed cash seeks better stores of value;

Step #7: More and more savers will reach their inflation pain threshold and start at Step 1 above.

Is this spiral increasingly likely? Below are four important indicators:

• Commodity price inflation;
• Large debts, particularly government debt;
• Long-term low returns for savers;
• A source of new money - usually the printing press.

Unusually, they are all now pointing in the hyperinflationary direction. They are worth looking at in some detail today...

This excerpt comes from a presentation made last month at CLSA's Investors Forum in Tokyo, Hong Kong and Singapore. You can receive the full report - Towards Hyperinflation - for free today, plus a complimentary gram of gold, stored securely in Zurich, Switzerland. Simply register with BullionVault here... http://bullionvault.com/Towards_Hyperinflation.do.