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Not discussed enough is the effect stock buybacks are having on the stock market over the last several years. The concept is simple. Corporations buy shares in the open market the same way ordinary investors do, however, when corporations do it, they ‘retire’ these shares leaving fewer shares outstanding. Each remaining outstanding share then represents a larger piece of the corporation. Therefore, when total earnings are reported a smaller number of shares divide into them. This increases earnings per share more than total profit of the corporation would indicate. Share prices then rise accordingly with the increase in earnings per share. Additionally, buying shares in the open market provides a further boost to share price.

However, this may be sacrificing long-term growth for short-term gains. Corporate cash used for stock buybacks is diverted from investing in additional opportunities,i.e. of buying plants and equipment and employing more people to create more profits over the long run. Corporations are even borrowing to finance stock buybacks; putting more and more debt on their books for future managers to deal with. Activist investors concerned only with immediate gain are forcing the issue. Managers who do not implement buybacks are soon unemployed.

Stock buybacks are a major component of what is driving the stock market to record valuations. It also helps explain why the market is soaring while full-time jobs have not recovered to pre-recession levels.

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Another deflationary impulse hit the global economies. Japan announced shocking news. After several decades of no economic growth, the Japanese government has piled up massive debt. They desperately need to get their economy going and just announced a desperate plan. After the Bank of Japan (their Federal Reserve) copied our grand growth experiment of flooding the economy with vast quantities of newly created money (QE), they are going all in. While our Federal Reserve tapered money creation, Japan is boosting their efforts to the equivalent of three times that of our Federal Reserve. Moreover, the Bank of Japan will be indirectly investing in the stock market (governments creating cash to buy stock … what next?). Of course, the Japanese yen crashed on this news.

So what does this mean for the U.S. economy? In a word: deflation. A cheaper yen means they will try to undercut their Chinese, American, and German competition and export more. They are debasing their currency to steal business from other nations. Competing economies will be forced to retaliate by cheapening their currencies. In a currency war, when everyone tries to fix their slow economy problems at each other’s expense, everybody loses. Currency debasement leads to the inevitability of instability and/or eventual inflation.

Therefore, for now, there is worldwide deflation. The price of gold and silver, which traditionally hedges against inflation and instability, has stagnated. However, in a world of currency debasement or, in other words stuffing the world with more and more currency from nowhere, precious metals are the last stable currency. Governments cannot create gold. Citizens of developing economies know this. That is why they are buying gold and silver at record rates. Even some of the foreign central banks are buying gold and building their gold reserves.

In the past, gold has held its value. Currencies run by desperate governments have not.