What a difference a year makes.

At this time last year, the Nasdaq was roaring ahead toward the 5000 hurdle (which it cleared) while the Dow Jones was approaching 11,000 on its way to 36,000 according to one popular book. The stock market was discussed at all social gatherings and almost everyone was talking about how well their investments had down in the past year or two.

Today, the Dow appears to be falling back toward 10,000 and the Nasdaq has lost more than 50 percent of that euphoric value that seemed so real such a short time ago. What has happened, and should we worry?

Although the Federal Reserve will never admit their purpose, they were concerned about the speculative bubble that was putting undreamed of values upon companies that never showed they could make a profit. Other favored companies reached valuations of visible earnings that were historically never achieved before.

Under rising interest rates, the speculative bubble burst. As with all economic excesses, the fallout was greater than the speculative losses themselves. Companies bought customers by extending terms that exposed accounts receivable to rising risk.

When the rising interest rates finally undermined stock market values, equity financing became scarce, especially for new companies. Many could not pay for the technology they bought. As defaults rose, many established companies suffered.

The impact of this deteriorating financing became clear during the fourth quarter, when spending on telecommunications, computing equipment, and computer software actually fell by 4.6 percent. This compared with spending gains of more than 20 percent earlier in the year.

Moreover, the adjustments are not over. Bank surveys show that almost 60 percent of all banks have increased their lending restraints, up from less than 40 percent early in the fall. There appears to be no rebound in technology spending early in 2001.

At the same time, the sagging stock market has presaged sagging consumer confidence and consumer spending. With spending falling so sharply during the fall, production has not been able to adjust. The result has be unintended inventory accumulations.

Of course, the story is not completely bleak. In December, inventory growth slowed while sales growth reappeared. As a result, we are no longer adding to our inventory problem. Even so, it will take another 3 to 5 months to reduce production sufficiently below sales to eliminate the excess inventories that have been acquired.

But another genie has jumped out of the bottle. After a year of rising energy prices, even more so for natural gas than for petroleum products, inflation appears to have spread to the service sector. Workers no longer can accept the same wage gains as a year ago and still pay their heating and transportation bills.

Although the economy is slowing, unemployment remains low. In Silicon Valley, where dot.coms appear to be vanishing daily, the unemployment rate remains a low 1.8 percent. If you want a technology systems developer, you will pay six figures a year for that person. More significantly, wage increases are spreading in the services industries.

As a result, some economists have begun to talk about "stagflation", that combination of rising inflation and slowing economic activity that seriously undermines stock market values.

Too much can be read into the January inflation reports. After all, the tobacco price increases are intermittent while some of those service price jumps probably will not persist. My own forecast is for much more moderate inflation in the next few months.

Nevertheless, consumers are suffering from lost purchasing power because of energy costs while wage pressures are building. Furthermore, the lost stock market values will contain spending enthusiasm for much of this year.

This is not a favorable environment for stock market values.

Moreover, if that increased liquidity pumping into the economy by the Federal Reserve is converted to higher prices instead of more economic activity, then stock market conditions will remain troubled. I still believe that economic growth will resume in the spring and stock market values will anticipate that improvement.

However, a return to 5000 on the Nasdaq is not likely in the next few years and Dow 36,000 almost certainly is decades away. A year ago, who would have thought that "stagflation" would even be mentioned today?