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Part - II

Yet there are certain signs of caution too. GDP growth in Japan has slowed down to almost zero and to barely 1% in the European Union. Commodity prices have started to fall and this may be early warning of a recession. A Merrill Lynch report says that the ration of US company directors selling stocks to buying stock in their own companies was 6:1, a ratio exceeded only once in the last 30 years. So, insiders lack confidence.

The dollar has fallen and continues to fall further. A low dollar helps American companies sell goods and services abroad by making them cheaper to foreign buyers. But the U.S. also relies on foreigners for loans, in the form of Treasury bond purchases, which make American deficit spending possible. As the dollar becomes less valuable, foreign investors, including governments in China, Japan and elsewhere, could worry that they are losing money on Treasuries. Should they reverse course and start selling Treasuries, the dollar would fall further. To attract investors, Treasury-bond yields would then have to rise, causing interest rates for mortgages and other loans to go up as well, dampening U.S. economic growth.

A dollar collapse will mean unbearable currency appreciation for Europe and Japan and pushing them into recession. The fate of the dollar is tied to two worsening deficits. The federal budget deficit results from the government spending more than it is taking in. The current account deficit is caused when Americans - their government included - spend more than they earn, financing the difference with loans from foreigners. The current level of foreign financing of U.S. debt is not sustainable, heightening the risk of depreciation in the dollar.

Being optimists, we still swear by the steady growth of the US economy. According to Wharton finance professor Marshall E. Blume, although investors are unlikely to enjoy 1990s-style gains in stocks in 2005, they probably won't suffer the deep plunges that have characterized the markets in recent years. "What you're looking at for the future - for the next year or so - is slow, steady growth. The risk levels in the market are low. What that means is there's probably not going to be a lot of volatility. There are not a lot of surprises out there." Analysts say high prices for oil and other commodities made companies reluctant to hire in November. Since oil has fallen to around $41, from around $55 in late October; companies are likely to pick up recruitment.

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* Contributed by -
Ravi Birhman, B.E. (Computer Science), BITS, Pilani,
Kshitij Goel, B.Tech. (Mechanical), IIT Guwahati,
Post Graduate Diploma in Management (First Year),
Indian Institute of Management, Calcutta.