American taxpayers and foreign governments holding U.S. bonds now have a small ownership position in the largest financial entity worldwide. However, the prognosticators have determined that this 8% ownership stake in Citigroup was necessary to keep financial markets afloat.

The new stimulus package, dubbed "The Stim" by the U.S. media, shows more tax dollars and more borrowed money going in to failing banks with the government possibly taking a 40% stake in Citigroup. Creeping nationalization!

The reason Obama’s "Stim" includes buyout money is to “prevent the collapse” of the U.S. credit markets which, at one point, fuelled business excesses (oops, sorry I meant to say growth) around the globe. Citi, AIG, Merrill and all of these mega-banks are so intertwined with each other and world banks across Asia, the EU, the Middle East and, yes, even Australia, that in effect, we’re all buying a bit of these "back-from-the-dead" zombie banks to protect what's left of the economy.

Imagine stopping by your local bank branch only to find a “Going Out of Business” sign on the locked front door. Think that would cause consumer panic on a global scale?

There’d be rioting in the streets and the death spiral in which we now find the global economy would only increase, widening to touch just about every business owner and every employee in Australia. Our economies are so intertwined with huge corporations like Citigroup that those of us who still believe there’s a place for free markets sit on the sidelines, helpless to turn away zombie banks propped up by tax and investment dollars.

China holds huge amounts of U.S. debt. They buy up T-bonds and notes like buying a bag of crisps. But at some point, countries will lose faith in America’s ability to support "The Stim". If China, Japan, Australia and other nations lose faith in American financial institutions, we’ve got some real problems. Enough to make you cringe.

Toxic Assets

Assets that are, in practice, worthless.

In most cases, these toxic assets take the form of non-performing mortgages and business loans that have been co-mingled into "structured debt instruments". Bundled by the likes of once rock solid institutions like Fannie Mae and Freddie Mac, these toxic assets have made their way into the world economy and are oozing across the globe, dragging down world markets with them.

The fact is that many U.S. (and some Australian) mortgages are actually "owned" by China, Japan and the EU. Now there’s a thought. You may pay your monthly mortgage through a local servicing company, but the underlying paper – the mortgage itself – is owned by China or Saudi Arabia.

We can expect to see more of these debt holders lose faith in toxic assets as an investment strategy, further tightening credit markets around the world. It’s a grade B movie scenario a la "The Blob" meets "Frankenstein" and we’re the audience.

Please pass the popcorn.

Is There a Solution for You and Your Small Business?

There is.

First, avoid any sort of borrowing at this time. There are companies and even individual consumers running up huge credit debt in the belief that the "government" will bail them out. It’s a false and risky assumption. At this stage, governments are in uncharted waters and borrowing in the belief that debt will be forgiven is not a business strategy. It’s gambling, pure and simple.

Live and run your business on a cash-only basis. That may mean taking steps to increase cash flow through the business by creating stricter controls on accounts receivable (net 15 days, sorry) and by dropping slow payers from the client list. Your small business simply can’t afford to finance the activities of your client base as you await payment. It is an interest free loan that must be absorbed by your business.

Simplify. To counter-act the complexities of the current business climate, simplify business practices and procedures. Inevitably, the process of simplification will lower costs of operation.

Expand service offerings to increase revenue flow. New offerings should dovetail with current offerings. Example? A small insurance broker can easily provide risk management training for a fee. It’s a natural fit – and a service that clients will appreciate.

Finally, become self-sufficient. Companies that rely on a small number of clients or customers are at higher risk of losing a key source of revenue when a large client decides your company’s services are expendable. Expand your client base through increased marketing and sales efforts to spread the risk. This way, your company is no longer a “satellite company” of two or three key clients.

The movie has just begun. Obama’s Stim, though approved by both the House and Senate is yet to be implemented. So, you may own a small business in Sydney or Adelaide and wonder how the U.S. economy impacts your retail outlet?

Zombie banks, toxic assets and creeping nationalization of financial institutions are facts in today’s economy, regardless of where you live, regardless of your service region. You will be impacted, if you haven’t felt the sting already.

I’m always the optimist and believe that, if given a chance, The Stim will work mainly because it has to. However, I’m also a realist and recommend that we all take steps to cut debt, simplify business operations and function on a cash-only, as-needed basis until we can see how this movie turns out.

I’m just hoping it’s not a double feature.