Take This Stimulus and Shove It

Let's review the patient's symptoms. American share prices have spent the past 135 years at an average of 15 times company profits, but for the past 20 years have fetched an average of 22 times profits. Since October prices have fallen 14%. Tuesday they fell back to average: 15 times profits. House prices have fallen, too, by 6.7% during the year ended October. That's the largest decline in 20 years, but nowhere near large enough to bring houses back to their historic ratio of prices to rents, or prices to incomes.

The dollar is falling, too. It's down 21% in five years vs. a trade-weighted basket of foreign currencies. Americans owe plenty and save little. The ratio of consumer debt to income has increased 30% over the past two decades. Americans now stash away less than 1% of discretionary income, vs. double-digit rates two decades ago.

Unemployment figures are tricky to read right now because of the seasonal hiring and firing that occurs around holidays. December's jobless rate jumped to 5%, a two-year high, but the number of people filing for benefits last week hit a four-month low.

I'm ready for a diagnosis, and you might be, too. America has a simple case of reversion to the mean. Its shares have become affordable for the first time since investors my age (35) began buying them. Its houses are on their way. Merrill Lynch forecasts a 15% drop in prices in 2008, followed by a 10% drop in 2009. (That might be pessimistic, since price declines for houses are less common than prolonged periods of flat prices giving incomes a chance to catch up.)

The profit decline is a return to normalcy, too. Corporate profits in 2006 reached their highest share of economic output in 40 years, a sign of overspending and of record lending profits amid a surge in asset prices. The dollar's value is more corrective than causal. America's trade deficit — the amount by which its purchases from foreigners exceed its sales to them — has increased sevenfold in a decade. A cheaper dollar helps to close this gap by discouraging imports and aiding exports. Indeed, during the third quarter of last year, overseas profits of American companies grew 20% year-over-year, according to Bank of America.