http://www.cato.org/pub_display.php?pub_id=11038

New Underground Economy

by Richard W. Rahn

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

Added to cato.org on December 9, 2009

The underground or "black" economy is rapidly rising, and the fault is mainly due to government policies.

Here is the evidence. The Federal Deposit Insurance Corp. (FDIC) released a report last week concluding that 7.7 percent of U.S. households, containing at least 17 million adults, are unbanked (i.e. those who do not have bank accounts), and an "estimated 17.9 percent of U.S. households, roughly 21 million, are underbanked" (i.e., those who rely heavily on nonbank institutions, such as check cashing and money transmitting services). As an economy becomes richer and incomes rise, the normal expectation is that the proportion of the unbanked population falls and does not rise as is now happening in the United States.

Tax revenues are falling far more rapidly at the federal, state and local level than would be expected by the small drop in real gross domestic product (GDP) and changes in tax law that have occurred since the recession began. The currency in circulation outside the U.S. Treasury, Federal Reserve banks and the vaults of depository institutions - that is, the currency held by individuals and businesses - has grown by 13.3 percent in the last two years, while real nominal (not inflation-adjusted) GDP has not grown at all, and real (inflation-adjusted) GDP incomes have fallen by more than 3 percent. With the growth of electronic means of payment and financial service providers, it would be expected that the currency component of GDP would fall, not rise.

Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.

More by Richard W. Rahn

The underground economy refers to both legal activities, such as often found in construction and services industries where taxes are not withheld and paid, and illegal activities, such as drug dealing and prostitution.

Countries such as the United States, Switzerland and Japan historically have had relatively small, nonreporting and/or illegal sectors, a typical estimate being 13 percent of GDP.

Most European countries have had somewhat larger underground sectors (typically 20 percent or so) in part because of the desire to escape higher tax rates. Italy and some of the other Southern European countries are believed to have underground sectors that account for 30 percent or more of all economic activity.

I recall an Italian finance minister telling a few of us at a meeting a couple of decades ago that, for policy purposes, he assumed that "the economy was 40 percent larger than what was reported." In some developing countries and/or highly corrupt countries, underground or "off the books" activities are estimated to be as high as 70 percent of all economic activity.

The FDIC report about the size of the unbanked or underbanked sector in the U.S. should be of concern because those who do not use the banking system often have to pay higher fees to cash checks, pay bills (e.g., money orders, etc.), or transmit funds.

People who keep their savings in cash at home rather than in banks make themselves easier prey for criminals and are more likely to lose their money to fire, flood, or just neglect. Not surprisingly, a majority (71 percent) of the unbanked have household incomes of less than $30,000 per year.

There are many reasons people do not have bank accounts. Banks, because of the "know your customer" and other anti-money laundering regulations, make it difficult for nonestablished people, such as the young and transient, as well as legal and illegal immigrants, to open bank accounts.

Also, many of these same regulations are responsible for the rise in bank fees, which are a particular burden for low-income people. You can be sure that every time Congress passes some new law or the IRS implements some new regulation to "get tax cheats," much of the real burden of these compliance costs will fall on those least able to afford it, while those intent on finding their way around it will do so.

People also avoid having bank accounts because they are vulnerable to asset seizure, judgments, levies, etc. Increasingly, bankers and others who provide financial services are forced by governments to spy and snitch on their own customers, and this is a real turnoff for many people, which causes them to find other ways of maintaining financial privacy.

Many studies have shown that when people believe the taxes they are required to pay are reasonable and the political leaders tend to spend their tax dollars wisely, tax compliance rises, and vice versa. In the United States, there is increased evidence that many tax dollars are not being spent wisely and are often used to pay off political cronies.

Over the past year in particular, the public has become aware that many in Washington who advocate higher taxes and argue that everyone has a responsibility to pay taxes are themselves not complying with the tax laws and regulations.

When you have a secretary of the Treasury and the chairman of the House Ways and Means Committee (the tax writing committee) accused of cheating on their taxes, it greatly undermines the moral authority of the tax collectors, making the common citizens feel like chumps and, hence, much more willing to try to legally avoid or illegally evade taxes themselves.

The evidence is unambiguous; governments cannot increase tax compliance and decrease the size of the underground economy by ever increasing and more onerous regulations.

It is no accident that those governments that allow their citizens a high degree of personal and financial liberty, including financial privacy, and spend taxpayer dollars wisely, honestly and competently, have much smaller underground sectors than corrupt and oppressive governments. Washington, take note.

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Gulf Currency Launched

http://www.telegraph.co.uk/finance/economics/6819136/Gulf-petro-powers-to-launch-currency-in-latest-threat-to-dollar-hegemony.html

The Arab states of the Gulf region have agreed to launch a single currency modelled on the euro, hoping to blaze a trail towards a pan-Arab monetary union swelling to the ancient borders of the Ummayad Caliphate.

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Short Term Reversal on EUR USD?

USD rate outlook positive based on Fed, Jobs Numbers

http://www.bloomberg.com/apps/news?pid=20601087&sid=aiVCp0RbJ5dQ&pos=1 Dec. 7 (Bloomberg) -- The yen strengthened and the dollar rose to its highest level in a month against the euro as investors weighed whether the world economy is recovering fast enough to warrant higher central bank interest rates. U.S. stock index futures and commodities fell.

The yen advanced against all 16 most-traded currencies tracked by Bloomberg as of 8:14 a.m. in New York. The dollar gained versus 15. The MSCI Emerging Markets Index dropped the most in six days, losing as much as 0.8 percent. Dubai's equity index plunged 5.8 percent to a four-month low. The Dow Jones Stoxx 600 Index of European companies sank 0.6 percent. Futures on the Standard & Poor's 500 Index slipped 0.3 percent, while gold fell for a third day.

FX NOW! AUD/USD, AUD/NZD Flows - AUD support still minimal vs USD, but it climbs vs NZD

Monday, December 07, 2009 9:32:00 AM

* 07 Dec 09: 14:32(LDN) - FX NOW! AUD/USD, AUD/NZD Flows - AUD support still minimal vs USD, but it climbs vs NZD

USD is still firm, though off its highs and equities are creeping higher again, but not much higher. For AUD investors, there is little reason to get involved and they are not. Day traders are monitoring the action in AUD/USD to ensure the pre-US employment data intraday forces like equity price action and commodity movement is relevant. So far, AUD/USD is soft, but the big move appears to be over for now. While the market is contending with low volume decay in AUD/USD, AUD/NZD has been climbing and the odds are high that 1.2800+ is going to be seen regularly as the market sets up for the RBNZ announcement that hits the wires at 20:00 gmt on Wed. M.B.

* 07 Dec 09: 13:35(LDN) - FX NOW! USD/CAD, EUR/CAD Flows - Canadian Building Permits jump 18%, CAD fails to react

Canadian Building Permits for Oct surprised the market by jumping 18% m/m compared with the 3,2% m/m increase seen in Sep (revised from 1.6% m/m). The actual outcome was much stronger than 4Cast's estimate of up 0.8% m/m. The larger than anticipated number is being blamed on the hard to predict and volatile non-residential sector. Despite the surprising strength in the data, CAD's reaction has been muted as dealers and investors continue to deal with Friday's surprising strength in both Canadian and US employment results. M.B.

* 07 Dec 09: 13:05(LDN) - FX NOW! GBP/USD, EUR/GBP Flows - In thin trade, GBP drops vs USD and slips a little vs EUR

USD's advance is occasionally interrupted or exaggerated by the spotty order flow seen so far in the eurozone today. The point is that USD continues to work its way higher and GBP is one of the currencies that is most vulnerable to USD's advance. Clearing banks and the normal covey of large dealers are generally credited with the movement in the market, though the order flows are nothing to speak of in size terms. M.B.

* 07 Dec 09: 12:31(LDN) - FX NOW! EUR/USD, USD/JPY Flows - USD starts the N. American trading day/week with a bid bias

While the move is not really very impressive, it is apparent that those FX deals going through in the early hours of the N. American day/week are still biased toward buying USD. So far, while equity markets languish and commodities look vulnerable, the USD has been range bound since the eurozone open, after adding to gains during the latter half of the Asian trading day. Order flows are light, but they may be the only key to market direction while the market continues to look cynically at the "normal" USD to equity relationship that broke down, at least for the very short term, on Friday. M.B.

* 07 Dec 09: 11:54(LDN) - FX NOW! EUR/JPY, GBP/JPY Flows - JPY softened by "jawboning" but that only works for so long

While the FX markets are starting the week completely focused on USD, it is worth taking a look at key non-USD prices. In very limited turnover, JPY is ticking up vs USD and driving ahead of the rest of the market. Hear the "risk off" scenario seems to have some weight. Working in the background is the market's growing cynicism regarding the expected release of additional measures by the BoJ. Expanded QE at the BoJ seems to be scheduled and it seems to be largely the bank's reaction to pressure from the government to do something to give the economy a boost. So far the lack of news is tending to offset a tiny bit of the JPY decay that has come due to ongoing "jawboning" by Japanese government and BoJ officials. M.B.

* 07 Dec 09: 11:17(LDN) - FX NOW! USD Index, Gold Flows - USD's rally having usual impact on commodities, gold drops

The broad based USD is continuing to climb. Market breadth and depth are usually limited on Mondays and today is no exception, but that is not stopping the USD from advancing. While the "risk off" scenario that usually accompanies a rally in the USD has softened the equity markets, the impact it is having on gold is much less subtle. Starting with the USD rally in post employment trading, gold has tumbled and the intraday lows on Monday of USD1136 have not been seen since 20 November. In the light trading seen so far today, there is not much room for a turnaround in either the USD advance or the downside price adjustments in gold or commodities in general. M.B.

* 07 Dec 09: 10:45(LDN) - FX NOW! EUR/USD, S&P Futures Flows-USD unilateral rally challenges cross market relationship

USD's advance, following Friday's suprisingly strong employment numbers has sent USD up across the board. USD's advance has been noted not only vs other currencies, which is obvious, but its advance has been blamed for sending gold prices and other commodity prices lower. The dealer community, that has been very comfortable with the equity vs USD relationship, is no longer comfortable after Friday's apparent breakdown in the relationship. While the USD may still have some room to advance unilaterally, the odds are strong that old relationships and pressures will reassert themselves, but they will need to be adjusted for new levels on the USD. M.B.

* 07 Dec 09: 10:27(LDN) - FX NOW! GBP/USD, GBP/JPY Flows - GBP falling behind more than just USD

During mid-session in the eurozone, GBP has been offered. GBP has been under pressure, like the rest of the market vs USD, but it is also having trouble uncovering support vs most of the remainder of the FX market. There is little chance that scheduled events this week like the Chancellor's pre-budget report and the regular BoE monetary policy meeting will give GBP any support. Corporate flows related to the Cadbury story are still bubbling in the background, but lack real substance for now. While there are many days where GBP leads the market, this week may be one of those weeks where it leads the market to the downside. M.B.

* 07 Dec 09: 09:24(LDN) - FX NOW! USD/CAD, EUR/CAD Flows- CAD is not particularly weak, USD is stronger than the rest!

USD just keeps going. CAD is keeping pace with EUR, where prices on EUR/CAD seem to be range bound in the 1.5650 to 1.5750 range. But, CAD is unable to keep pace with the broad based mark up in USD. Last week's report of the jump in Canadian Nov employment by 79.1k more than offset Oct's decline of 43.2k, but more important, it highlighted the volatility of the employment data and underscored the reason the BoC does not focus on employment data in the same way the Fed does. Tue's BoC monetary policy meeting is due to end without telling the market anything new (Search BoC + M/T for a preview). According to 4Cast analysts, the bank is to reinforce their comments that official rates will be held at 0.25% into the end of Q2, 2010. Technically, USD/CAD resistance that is in line to be tested is up at 1.0697, while more refined technical levels on EUR/CAD include resistance at 1.5730, with support seen at 1.5572. M.B.

* 07 Dec 09: 09:25(SGA) - FX NOW! USD/JPY, EUR/JPY Flows - exporters not done yet

The USD may be bid everywhere else, but the exporters have not finished yet. That's going to keep USD/JPY sidelined and EUR/JPY under pressure and while we might get some more comment from MoF officials they are not going to intervene at current levels - although there is an argument that they should. PB

* 07 Dec 09: 09:17(LDN) - FX NOW! EUR/USD, USD/CHF Flows - 'General support' doesn't rule out downside spikes.

If the Asian sovereign was a buyer, then it was obviously only a 'taster' as the futures led selling of EUR/USD keeps the USD moving higher. Stops now triggered on USD/CHF on the break of 1.0220 has seen a quick 'squirt' to break 1.0240, and setting up a move next to the 1.0250, and then 1.0277 levels. On EUR/USD, we now look for the 1.4775 trendline area to provide general support, though this does not rule out a push to 1.47 first! C.F.

* 07 Dec 09: 08:54(LDN) - FX NOW! AUD/USD, EUR/AUD Flows - AUD buyers can patiently wait for end of USD feeding frenzy

USD's advance is not over yet. AUD, the darling of the FX market this year, has yet to uncover investors willing to stand in the way of the US employment fuelled USD advance. AUD is holding its own vs other currencies, but even there, while the USD is advancing, AUD buyers are sitting on the sidelines. The market is AUD heavy and with year-end approaching, there is likely to be a wave of AUD selling associated with booking profits and ensuring bonuses. To offset that potential sell-off, there is a good deal of cash in investor hands that will need to be put to work over year end, which means the decline in AUD has an element of offering a growing opportunity. For now the cash will sit on the sidelines and the advancing USD is dictating broad market price action without specific buyers or sellers being noted/credited with pushing prices around. AUD/USD support levels that could tempt include 0.9060 and then down at 0.8985. M.B.

* 07 Dec 09: 08:51(LDN) - FX NOW! EUR/USD, SPZ9 Flows - Now and in the future.

A good start to the week for model and futures names, who have made quite an aggressive push at downside stops on a number of the majors, as equity futures prices fell in tandem. Stops at 1.48 on EUR/USD didn't appear to have bothered the scorers much, but a quick glance at 1.4775 was enough to bring a buyer back into the marketplace. Not confirmed yet, but suspicions that an Asian sovereign name might be that buyer are widespread. C.F.

* 07 Dec 09: 08:47(SGA) - FX NOW! EUR/SEK, EUR/NOK Flows - SEK feels the heat as USD Index races higher

The better bid USD and with it the index are putting question marks again over the durability of a SEK recovery. Questions are again being asked of recently re-applied EUR/SEK shorts, and the stops will be building over 10.50. The NOK is not vulnerable to the index trades, but with near WTI toying with a break of $75 is not without its problems. PB

* 07 Dec 09: 08:30(LDN) - FX NOW! USD/CHF, EUR/CHF Flows - It's the dollar!

Swiss retail sales for October rose by 3.1%y/y versus the 2.1% fall of the previous month, but its unsurprisingly giving little support to the CHF, which is actually keeping a smile on the face of SNB members by losing ground versus the stronger USD this morning. Technical studies suggest that the next resistance levels on USD/CHF will be seen at 1.0200/05, followed by 1.00222. C.F.

* 07 Dec 09: 08:00(SGA) - FX NOW! EUR/GBP, GBP/USD Flows - GBP sellers again

GBP an early loser in Europe as models tip again to the Cable sell side, while GBP/JPY sellers have also been noted after a good weekend for them. We see GBP as fairly vulnerable into the pre-budget report and BoE meeting. PB

* 07 Dec 09: 07:11(SGA) - FX NOW! EUR/USD, GBP/USD Flows - Europe in no rush to press the accelerator

There is still little to get excited about as Europe carries on where Asia left off, that is by not doing very much. There's very little data to look forward to, and none of it will come close to rivalling Friday's payroll release. We do expect EUR/USD to head back over the figure, though note there has been no obvious sovereign interest on that side today so far. On Cable, while there has been some short covering among model traders we suspect there are enough potential pitfalls this week to keep appetites for GBP suppressed. PB

* 07 Dec 09: 06:48(SGA) - FX NOW! USD/JPY, EUR/JPY Flows - awaiting Europe; Fujii still wants a stronger USD

A very quiet Asian session awaits European input with FinMin Fujii hitting the wires by telling the World Bank president that he hopes the USD will become stronger, according to JiJi press. The post payroll bounce may have persuaded Fujii that verbal intervention is all that is needed, but we strongly suspect that USD/JPY is benefiting more from an accident of timing. PB

* 07 Dec 09: 03:49(SGA) - FX NOW! EUR/USD, GBP/USD Flows - both recovering, different speeds

Both EUR/USD and Cable are short of the modest session highs, certainly compared to where they were this time on Friday. We still consider that GBP has far more booby traps lined up for it this week than the EUR, and have a lot more confidence in a EUR recovery than seeing EUR/GBP trade again below .9000. PB

* 07 Dec 09: 03:37(SGA) - FX NOW! USD/JPY, EUR/JPY Flows - taking profits; Otsuka keeps the verbals up

USD/JPY and the crosses continue to drift lower after the exporters stepped in at the top and the lack of momentum is playing to late morning profit taking. Vice Financial Services Minister Otsuka is on the wires saying the government needs to address the matter of FX rates, but we suspect that we are some way clear of intervention levels. PB

* 07 Dec 09: 02:05(SGA) - FX NOW! AUD/USD, NZD/USD Flows - Massed ranks wait for next AUD bounce

Some encouraging data has helped underpin AUD/USD through it's latest test of support in the .9100/20 area and as everyone gets settled in for another run up to around .9300, though here again the main danger to another recovery is still that everyone appears to be the same way! NZD is keeping pace despite FinMin English again being reported warning that the way ahead will be bumpy and the recovery is still threatened, although some might suggest that 'gloomy' could be his middle name. PB

* 07 Dec 09: 01:50(SGA) - FX NOW! EUR/GBP, GBP/USD Flows - CEBR sees UK out of global top 10 by 2015

The UK's Independent newspaper highlights a report by the CEBR predicting that the UK economy will slide out of the global top ten by 2015and is already down to 7th from 4th since the turn of the century. It's not going to help sentiment towards GBP on the approach to the pre-budget report on Wednesday, that being quickly followed by the BoE MPC meeting and decision on Thursday, the central bankers not being the biggest fans of government policy just now. PB

* 07 Dec 09: 01:24(SGA) - FX NOW! EUR/USD, USD/JPY Flows - China still in no hurry to let the CNY appreciate

Having had visits from high powered delegations including US President Obama and a who's who of financial officials from the Eurozone in recent weeks, all hoping to get some progress towards a freeing up of the CNY, an essay in the International Business Daily from the research institute of the Chinese Ministry of Commerce doesn't hold out a lot of hope for an early move. "Forcing the CNY to appreciate would undoubtedly be unfavourable for the Chinese economy and likewise do no good for the sustained recovery of the world economy" just about sums it up! PBGMT

* 07 Dec 09: 01:08(SGA) - FX NOW! USD/JPY, EUR/JPY Flows - stimulus package due today; excitement confined

Japanese PM Hatayama says we can expect the decision on an extra stimulus today, probably helping nudge USD/JPY back over 90.00 but the pair look set to trade a relatively (especially given recent price action) range until we get any details. PB

* 07 Dec 09: 00:28(SGA) - FX NOW! EUR/USD, USD/CHF Flows - picking up the pieces again; SNB can relax (EUR/CHF)

Picking up the pieces from a late Friday EUR/USD sell off is far from a new task for traders in Asia on a Monday morning, though buyers are not making a great deal of headway despite the bounce in the N225 suggesting that risk appetite is very much switched to 'on'. The overall better bid USD scenario does have one benefit for the Swiss National Bank in that it has pushed EUR/CHF back over 1.5100, though the 1.5050/1.5150 trade still looks a standing order there. PB

* 06 Dec 09: 23:50(SYD) - FX NOW! USD/JPY, EUR/JPY Flows - Exporters not looking a gift horse in the mouth?

The fierce rally in USD/JPY in the aftermath of the US payrolls report seems bound to put some more daylight between the Nikkei and the 10,000 level at the reopen in 20 minutes. Whether this in turn suffices to insure fresh (risk appetite related) yen weakness remains to be seen. Price action ahead of the Nikkei re-open suggests otherwise (are we about to a see a pick up in foreign investor interest in Japanese equities?). We doubt though that exporters will/are being too shy in taking advantage of the present made to them by the US Bureau of Labour Statistics. News wise, the Nikkei reports that the government is to apply a three year moratorium on applying withholding tax on foreign investor holdings of Japanese corporate bonds. We don't have data to hand on foreign interest in corporate bonds to know how potentially significant this is, but strongly suspect the answer is 'not very'. RA

* 06 Dec 09: 22:35(SYD) - FX NOW! AUD/USD Flows - Rio sells JV stake to BP, did BP sell GBP/AUD?

Alongside news that BHP and RIO have finally signed an agreement related to its iron ore assets in the Pilbara region of WA (but which is going to be subject to some severe competition scrutiny, including from the EU) comes news that Rio has sold out its 50% stake in its Hydrogen Energy International JV to its partner, BP. The cash sum involved is undisclosed so we are not sure whether it is significant enough to make a dent in GBP/AUD though looking at the price chart one could be foreign for thinking that the answer might be 'yes'. RA

* 06 Dec 09: 21:58(SYD) - FX NOW! AUD/USD, EUR/AUD Flows - Softer start, but note LNG, Olivier job index news

While the Aussie was inevitably a victim of the rush back into dollars in the wake of Friday's US payrolls report, it closed in NY little changed against the euro on pre-NFP levels but has softened slightly thus far in APAC trade. Australia specific stories that should be capturing the imagination today includes confirmation of a A$90 deal between Japan and Chevron's Wheatstone LNG project in WA, with the AFR saying that long term export sales contracts for LNG signed so far this year now top A$500bn. Investment spending in the Wheatstone project alone is expected to be A$15bn (that's nearly 1.5% of current Australian GDP). We also had the Olivier job index out ahead of this morning's ANZ jobs ads and Thursday's November employment report and which jumped 5.88% (+7.84% over the past three months). RA

* 06 Dec 09: 21:08(SYD) - FX NOW! NZD, NZD/JPY Flows - Kiwi softens vs dollar as Fed exit in focus; but firms vs yen

Much stronger than expected US payrolls boosted equities but most gains were not sustained as markets worried about the impact on interest rates. This also saw the 'dollar smile' back in force, with the USD bid across the board as the Fed exit policies and the free money environment came into question, with NZD/USD dropping a full big figure to 0.7150 - though the largest damage was in the yen, which may become the favoured carry trade as the BoJ enters (quasi) QE even as expectations of Fed QEP begin to fade. This saw NZD/JPY rise while NZD/USD dropped, the former trading almost as high as 65.00 (now 64.55) after being capped under 64.00 throughout Friday's Asia session. The week ahead sees GDP indicators on Monday and Tuesday and Q3 Tot on Thursday, with the highlight the RBNZ on Thursday, seen maintaining its on hold rhetoric from October. MK

* 04 Dec 09: 21:47(NYC) - FX NOW! Percentage Change - Recap - (FLOWS, USD, AUD, CAD, CHF, EUR, GBP, JPY, NZD)

CAD's encouraging domestic employment report neutralised USD's strength following the much better than expected US employment report. The rest of the list wasn't as lucky as the mkt upped odds of Fed tightening, with JPY at the bottom of the pack after already being vulnerable all week as the gov't attempts to jawbone the JPY lower. SI

* 04 Dec 09: 21:23(NYC) - FX NOW! EUR/USD, USD/JPY Flows - Recap

* 04 Dec 09: 20:13(NYC) - FX NOW! USD/CAD, AUD/CAD Flows - CAD gives back gains vs USD

USD/CAD has taken back all of its losses folllowing its impressive domestic employment report, with today going without question to the USD where its employment report wow'ed a broader following. Weak equities and commodities, in reaction to the firmer USD, doesn't help CAD. Still, a look as AUD/CAD falling to settle near 0.9650 from 0.9750 shows that CAD is still underpinned by the favourable data on its crosses, although also giving back some there as well. SI

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Beige Book Summary dec 2nd

Prepared at the Federal Reserve Bank of New York and based on information collected on or before November 20, 2009. This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.

Reports from the twelve Federal Reserve Districts indicate that economic conditions have generally improved modestly since the last report. Eight Districts indicated some pickup in activity or improvement in conditions, while the remaining four--Philadelphia, Cleveland, Richmond, and Atlanta--reported that conditions were little changed and/or mixed.

Consumer spending was reported to have picked up moderately since the last report, for both general merchandise and vehicles; a number of Districts noted relatively robust sales of used autos. Most Districts indicated that non-auto retailers were holding lean inventories going into the holiday season. Tourism activity varied across Districts. Manufacturing conditions were said to be, on balance, steady to moderately improving across most of the country, while conditions in the nonfinancial service sector generally strengthened somewhat, though with some variation across Districts and across industries. Residential real estate conditions were somewhat improved from very low levels, on balance, led by the lower end of the market. Most Districts reported some pickup in home sales, though prices were generally said to be flat or declining modestly; residential construction was characterized as weak, but some Districts did note some pickup in activity. Commercial real estate markets and construction activity were depicted as very weak and, in many cases, deteriorating.

Financial institutions generally reported steady to weaker loan demand, continued tight credit standards, and steady or deteriorating loan quality. In the agricultural sector, the fall harvest was delayed in the eastern half of the nation due to excessively wet conditions during October and early November. Most energy-producing Districts noted a slight uptick in activity in the sector since the last report. Labor market conditions remained weak since the last report, though there were signs of stabilization and scattered signs of improvement. While some Districts reported upward pressure on commodity prices, they saw little or no indication of upward wage pressures or of any significant increase in prices of finished goods.

Consumer Spending and Tourism
Consumer spending strengthened since the last report, with sales of both general merchandise and autos improving across much of the country. Non-auto sales were reported to have picked up in the New York, Philadelphia, Cleveland, Richmond, Atlanta, Kansas City, and San Francisco Districts; sales were described as steady or mixed in the Boston, Chicago, Minneapolis, and Dallas Districts. St. Louis described retail sales as below expectations and down from a year earlier. Auto sales generally improved since the last report, in some cases rebounding from a brief dip after the "cash-for-clunkers" program ended. Increased vehicle sales were reported from New York, Philadelphia, Richmond, Chicago, St. Louis, and Dallas, while sales were described as flat or mixed in the Cleveland, Minneapolis, Kansas City, and San Francisco Districts. A number of Districts reported that used vehicles have been selling better than new ones.

Most Districts also noted that retailers were holding leaner inventories this holiday season, though some indicate that retailers have recently become more optimistic about the holiday-season outlook. Auto dealers' inventories, largely depleted during the cash-for-clunkers program, have been or are being rebuilt.

Tourism was mixed across those Districts reporting. Travel and tourism--especially leisure travel--was described as robust or improved in the New York, Dallas, and San Francisco Districts. Atlanta and Kansas City characterized tourism as sluggish, while Richmond and Minneapolis described it as mixed; Richmond noted that tourism has been adversely affected by severe and damaging coastal storms, while Kansas City characterized the outlook as "grim." New York indicated that business travel remained sluggish, but Minneapolis and Dallas note a slight pickup.

Nonfinancial Services
Activity in the service sector generally picked up since the last report, though results were mixed across Districts and across service industries. New York and Philadelphia reported that service-sector activity overall remained steady to up slightly, while St. Louis noted expanding activity. The information technology industry was reported to be showing improvement in the Boston, Minneapolis, and Kansas City Districts. A pickup in activity at staffing firms was reported by Boston and Dallas, whereas New York noted that activity remained sluggish. Strength in health services was noted in the Boston and Richmond Districts. Shipping activity was characterized as flat in the Cleveland, Atlanta, and Kansas City District, while Dallas reports some gain; however, Dallas and Atlanta both noted particular weakness in rail shipping activity. Professional and business support firms reportedly registered some improvement in the St. Louis and Minneapolis Districts but flat to declining activity in Richmond and San Francisco.

Manufacturing
Most Districts reported mixed to moderately improving manufacturing conditions since the last report. New York, Philadelphia, Cleveland, Minneapolis, Kansas City, and San Francisco all noted modest increases in manufacturing activity within their Districts. Manufacturing conditions in the Boston and Dallas Districts were characterized as mixed, with some improvement noted for biopharmaceuticals companies in Boston and high-tech manufacturing firms in Dallas. By contrast, Richmond and Chicago both reported that manufacturing activity had leveled off since the last report, while activity continued to decline in the Atlanta and St. Louis Districts, although at a somewhat slower pace than the last report. Tighter credit limited the ability of customers to place new orders in the Richmond District, while in the Chicago District, contacts noted a slowdown in the restocking of inventories. Increases in activity related to the transportation industry were cited in the Chicago, St. Louis, Cleveland, and Kansas City Districts, although such activity was mixed in the Dallas District and reported as declining in the San Francisco District. Several Districts noted an uptick in food-related production.

Many Districts reported that their contacts were optimistic about the near-term outlook. Manufacturers in the Boston, New York, Philadelphia, Atlanta, Minneapolis, and Kansas City Districts expected business conditions to improve in the coming months, while producers in the Cleveland District expressed uncertainty about near-term conditions. The outlook in the Dallas District was mixed, with most manufacturers expressing cautious optimism about the near term and construction-related manufacturers expressing pessimism about the future largely due to expectations of prolonged weakness in commercial real estate.

Real Estate and Construction
Home sales and construction activity improved across much of the nation, though prices were generally said to be flat or still declining somewhat. A majority of Districts reported that the lower-priced segment of the housing market has outperformed the high end. Increases in sales activity were reported in the Boston, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts, whereas sales were described as steady or mixed in the New York and Philadelphia Districts. Multifamily housing markets deteriorated further in the New York and Chicago Districts. More broadly, a number of eastern Districts reported continued declines in home prices--specifically, Boston, New York, Philadelphia, and Richmond. In contrast, prices were said to have firmed somewhat in the Dallas and San Francisco Districts and stabilized in the Chicago and Kansas City Districts. Most reports maintained that the lower end of the market has outperformed the higher end: New York, Philadelphia, Richmond, Atlanta, Minneapolis, and Kansas City all noted relative weakness at the high end of the market, with relative strength at the lower end; in most cases, this strength was largely attributed to the homebuyer tax credit (which was recently reinstated and expanded to include existing owners).

Despite the firming in sales, the level of new residential construction activity was generally characterized as weak, though recent trends have been mixed--Atlanta, Kansas City, and Dallas noted some pickup in home construction, whereas the Chicago and St. Louis Districts reported declines. Residential construction was described as flat or stabilizing by Cleveland, Minneapolis, and San Francisco.

Commercial real estate conditions were widely characterized as weak and, in many cases, deteriorating further. Market conditions were reported to have weakened in virtually all Districts, with rising vacancy rates, downward pressure on rents, and little, if any, new development. Expectations for 2010 were also quite low. Boston characterized the commercial real estate outlook as "bleak," Dallas noted that construction was at "historically low levels," and Kansas City described the sector as "distressed." Still, some Districts noted scattered signs of encouragement: Cleveland and Chicago referenced public-works projects as a source of increased business, Richmond noted signs of increased leasing activity from the health and education sectors, Atlanta indicated a modest pickup in new development projects, Minneapolis noted some recently started hotel and retail development, and San Francisco cited slight improvement in availability of financing for new development.

Banking and Finance
Banks reported steady to softer conditions in most Districts. Loan demand was said to have weakened in the New York, Philadelphia, Cleveland, St. Louis, Kansas City, and Dallas Districts. New York noted particular weakness in demand for home mortgage loans, whereas Richmond and St. Louis reported this to be the strongest segment of late. For the most part, the weakness appears to have been concentrated in the commercial sector, though Boston and Chicago reported some pickup in commercial real estate lending--largely refinancing. Credit quality showed signs of deteriorating in the New York, Philadelphia, Dallas, and San Francisco Districts but was described as stable or mixed in Cleveland, Chicago, and Kansas City, with Chicago reporting some improvement outside of commercial real estate. Increasingly tight credit standards were reported in the New York, Richmond, Chicago, St. Louis, Dallas, and San Francisco--largely on commercial loans.

Agriculture and Natural Resources
Excessively wet conditions during October and early November were reported in a number of Districts. As a result, the fall harvest was delayed in many parts of the Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Kansas City Districts. Flooding from Tropical Storm Ida and a November "nor'easter" damaged crops and delayed planting throughout the Richmond District, and Virginia health officials closed fishing in all Chesapeake Bay tributaries and temporarily banned the harvesting of shellfish due to potential storm water contamination. By contrast, rainfall in the Dallas District helped alleviate drought conditions experienced in many parts of the region. Contacts in the Chicago, Minneapolis, and Kansas City Districts noted that corn and soybean prices rallied over the past month, although a wide variation in margins was expected for crop farms due to differences in input costs. Losses for livestock operations occurred in the Chicago and Kansas City Districts.

Most energy-producing Districts reported a slight uptick in activity in extraction industries since the last report. Contacts in the Cleveland, Atlanta, Dallas, Minneapolis, Kansas City, and San Francisco Districts noted steady to increasing oil and natural gas production within their regions, albeit from low levels of production observed earlier this year. Contacts in the Cleveland District also reported that a sharp decline in coal production had leveled out since the last report. In general, oil prices increased somewhat, while reports on the price of natural gas were mixed due in large part to differences in inventory levels across Districts. Mining activity in the Minneapolis District increased.

Employment, Wages, and Prices
Labor market conditions remained weak since the last report, with further layoffs, sluggish hiring, and high levels of unemployment in most Districts. However, contacts in the Atlanta, Cleveland, and Richmond Districts reported that the pace of job cuts generally slowed in their regions, and most contacts in the Dallas District reported stable employment levels. Despite generally weak employment conditions, some signs of improvement were noted. For example, contacts in Boston reported that they were beginning to hire and reverse pay cuts or freezes that were implemented earlier in the year, and contacts in the St. Louis District reported that the service sector had started to expand recently. Expectations for the holiday season were mixed across Districts, with contacts in the New York and Dallas Districts reporting lighter-than-normal seasonal hiring and/or increases in the hours of existing employees, as opposed to hiring temporary workers, to meet the seasonal demand. On the other hand, most retailers in the Richmond District have hired the usual number of seasonal workers this year.

Districts generally reported little or no upward wage pressures, while some Districts noted upward pressure in commodity prices, and most Districts reported stable selling prices. Wages were largely reported to be holding steady in the Boston, Cleveland, Richmond, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts. Most Districts reported stable prices overall, although some reported higher input prices, largely for energy and other commodities used in production, with a limited ability to raise selling prices. Prices were reported as moderately lower in the Kansas City District, and downward price pressures were cited for some professional services and intermodal transportation firms in the Dallas District. Some makers of food products and chemicals in the Philadelphia District reported raising prices, and the prices of computer memory chips continued to firm in the San Francisco District. Retailers in several Districts indicated that they have managed inventory levels in an effort to prevent the steep price discounting that occurred last year, however, some promotional price discounting is expected through the holiday season.

http://www.federalreserve.gov/fomc/beigebook/2009/20091202/default.htm

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SEC Obtains Asset Freeze in Minnesota-Based Foreign Currency Trading Scheme

FOR IMMEDIATE RELEASE
2009-253

Washington, D.C., Nov. 24, 2009 — The Securities and Exchange Commission has obtained an emergency court order freezing the assets of a self-proclaimed Minneapolis-based money manager, a nationally syndicated radio personality and four companies they controlled in a foreign currency trading scheme that raised at least $190 million from more than 1,000 investors.

 

Additional Materials

• Litigation Release No. 21313
  
• SEC Complaint
  

 

The SEC alleges that Trevor G. Cook and Patrick J. "Pat" Kiley sold unregistered investments through shell companies by misrepresenting that they would deposit each investor's funds into a separate account in the investor's name to trade in foreign currencies and generate annual returns of 10 percent to 12 percent. They also misrepresented that their foreign currency trading program involved little or no risk and that investors' principal would be safe and could be withdrawn at any time. Kiley pitched the investments on his financially themed "Follow the Money" show that he hosted on radio stations nationwide.

According to the SEC's complaint, filed in U.S. District Court for the District of Minnesota, Cook and Kiley instead pooled investors' funds in bank and trading accounts in the names of entities they controlled. The foreign currency trading they did conduct resulted in millions of dollars in losses. Moreover, they misused approximately half of investor funds collected to make Ponzi-like payments to earlier investors and pay for Cook's gambling losses and purchase of the historic Van Dusen Mansion in Minneapolis.

"Cook and Kiley told investors that their money would be invested safely and profitably," said Merri Jo Gillette, Director of the SEC's Chicago Regional Office. "Instead, they went on a $40 million-plus spending spree with investors' money and lost another $40 million in risky foreign currency trading."

In addition to Cook and Kiley, the SEC charged their unregistered companies UBS Diversified Growth LLC, Universal Brokerage FX Management LLC, Oxford Global Advisors LLC, and Oxford Global Partners LLC.

The SEC alleges that Cook and Kiley misappropriated $42.8 million of investors' money, including $18 million that Cook used to buy ownership interests in two trading firms; $12.8 million that Cook and Kiley transferred to Panama to purportedly finance the construction of a casino; $2.8 million that Cook used to acquire the Van Dusen Mansion and $4.8 million that Cook lost through gambling. Cook and Kiley also misspent approximately $51 million to make Ponzi-like payments to earlier investors. The SEC further alleges that Cook and Kiley placed $108 million of investors' funds into banking and trading accounts in the names of their various shell companies and used some of this money to trade foreign currencies, resulting in losses of at least $48 million.

The Honorable Michael J. Davis of the U.S. District Court for the District of Minnesota issued an Asset Freeze Order against all assets of Cook, Kiley, and the Defendant Companies on Nov. 23, 2009. The court also issued an asset freeze order against several relief defendants for the purposes of recovering investor funds in their possession: Basel Group LLC, Crown Forex LLC, Market Shot LLC, PFG Coin and Bullion, Oxford FX Growth L.P., Oxford Global FX LLC, Oxford Global Managed Futures Fund L.P, UBS Diversified FX Advisors LLC, UBS Diversified FX Growth L.P., and UBS Diversified FX Management LLC. The court also entered a freeze order against certain assets of Cook's in-laws, relief defendants Clifford and Ellen Berg, who received investor funds from Cook. In addition, Judge Davis issued an order appointing a receiver over all of these assets. The court issued the freeze and receivership orders under seal while the assets were being secured, and the seal has now been lifted.

The SEC's complaint charges Cook, Kiley, and their companies with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition to the emergency relief already obtained, the complaint seeks preliminary and permanent injunctions and disgorgement from all defendants as well as financial penalties from Cook and Kiley, and disgorgement of ill-gotten gains from the relief defendants.

None of these entities using the UBS name are affiliated with UBS AG, the Switzerland-based global financial services firm.

The SEC acknowledges the assistance of the Commodity Futures Trading Commission, the Swiss Financial Market Supervisory Authority, the National Futures Association, and the Minnesota Attorney General in this investigation.

# # #

For more information about this enforcement action, contact:

Timothy L. Warren
Associate Regional Director, SEC's Chicago Regional Office
(312) 353-7390

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