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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;
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- Large debts, particularly
government debt;
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- Long-term low returns for
savers;
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- A source of new money -
usually the printing press.
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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.
Paul Tustain
Director
and Founder
Bullionvault.com
Also by Paul
Tustain
Paul Tustain is director and
founder of BullionVault - the world's
fastest-growing gold ownership service, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
Please Note: This article is to
inform your thinking, not lead it. Only you can decide the best place for
your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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