No-one likes an economic correction, says Bill Bonner. But they are both “essential and helpful.” If left to its own devices, the market will sort out its own mess. But the Fed will never let this happen. And just like Japan in the 90’s, this will only draw out the suffering.

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Spare a moment to remember Marcus Aurelius. Obama hasn’t yet called our “Sovereign Hotline” for advice. But when he does, we’re going to recommend he read Marcus Aurelius’s meditations.

Obama has pledged to change things. That part will be easy; things are changing fast. Trouble is, they’re not changing in the way he would like.

When Marcus Aurelius was emperor, Rome was going through major changes too. There were periods of famine, war and plague. Most alarming, the barbarians were at the gates; Marcus Aurelius spent most of his career trying to keep them out.

But you can’t win ‘em all. Losses are inevitable. And losses are not necessarily a bad thing:

“Loss is nothing else but change, and change is Nature’s delight,” he wrote.

Is you’re wondering how this connects to the economy going into rehab… we’re wondering too… oh yes… now we remember…

Over the last few weeks, we’ve been laying out a view of what is going on. We’ve explained that corrections are not only inevitable… they’re essential and helpful. Like death, no one likes them… but, like death, they clear away the old mistakes and the old wood… making way for new life and new mistakes.

“Change is Nature’s delight,” as Marcus Aurelius puts it.

(Trying to stop change, on the other hand, is Nature’s horror… almost an affront to God himself. But we’ll leave that theme for another day…)

When people borrow too much money, for example, the day eventually comes when things change and they have to pay it back.

And when the party gets too wild for too long, inevitably things change and somebody ends up in rehab. Now, following the wildest party in human history, most of the world’s economy has gone into rehab… and may not come out for a long time.

In this period of rehab, corporations, investors and households need to pull themselves together. They need to get rid of houses, projects, businesses, and speculations that they can’t afford. It’s a “balance sheet recession,” as Richard Koo puts it. Balance sheets need to be repaired. Debt must be paid off or written off. Expenses must be reduced so that they can be supported by revenues, and still leave something left over to pay down debt and build up savings. This is hard to do, because revenues are falling too.

Every man looks to his own. Each one cuts his expenses.

“It’s dead out there,” said our taxi driver yesterday. “I don’t know why I bother to come to work. Everybody’s afraid to take a taxi. They’re afraid it might bankrupt them. It’s silly really. They could save a lot of money by getting rid of their cars and just taking cabs. But I would say that, wouldn’t I?”

The taxi driver was talking his book. But he was talking sense too.

“People consider taking a cab a luxury. And it’s easy to cut out. You can see them on the street. They raise their arms to hail a cab and then they think again. They put their arms down and go look for a tube stop. They probably don’t really save much money, but it’s psychological. Suddenly, everybody thinks he has to save money. I can’t remember anything like it.”

But one man’s expense is another man’s income. The man who saves a pound by not taking a London cab, denies a taxi driver a pound of revenue…. who then buys a pound less of diesel fuel… or a pound less of clothing… or a pound less of something. It is what economists call the “fallacy of composition,” the mistaken idea that what is good for one person is necessarily good for the whole lot. Cutting back on spending is clearly good for the individual, but it does to an economy roughly what a visit from a sniffling grandson does to a bedridden great-grandmother. Pretty soon, the old lady is dead.

“Losses happen,” Marcus Aurelius might say. “Get over it.”

Instead of getting over it, the feds are going to fight it every step of the way. Of course, Japan tried to fight it too, and that its efforts didn’t work. Just look at the evidence: the Japanese tried fiscal stimulus (government spending) and monetary stimulus (central bank policies). They ran deficits of 6% of GDP – equivalent to about a trillion dollar deficit in the US. And they took interest rates down to near zero and left them there for years. What else could they do?

Still, as of last week, Japanese investors were about $15 trillion poorer than they had been 18 years ago.

That is why we say these efforts didn’t work. But maybe they worked better than we realize. Maybe the damage might have been a lot worse if the Japanese had not done what they did.

Whatever the case, Obama is about to follow the lead of Hata, Obuchi, Mori and Murayama. And Ben Bernanke, too, will follow the lead of the Japanese. He will cut rates… just like the Bank of Japan did.

But there are two crucial differences between Japan and the US. First, Japan had a healthier economy, with a positive trade balance, and huge savings. Second, the US has the world’s reserve currency.

Japan could easily spend 6% of its GDP trying to replace private spending with government spending. The Japanese saved 19% of GDP. The government could simply borrow from its own people – like the US did to finance WWII.

But America can’t finance huge deficits internally; it doesn’t have the money. Its people don’t save. They have no savings to lend their government. Any money the government gets from Americans will have to come out of current private spending or out of other investments. Obviously, this is not going to do much good, since there is no net increase in spending or investing.

Nor can the US government expect to bring in unlimited financing from foreign sources. The foreigners save, but they need their money to rescue their own economies. What’s worse, the more the US government has to compete for funds with other borrowers, the more interest rates will go up – worsening the picture for the economy as a whole.

The other point is vitally important too. Not only did Japan have a cushion of cash to comfortably sit out the correction, it had no reason to do otherwise. With money in the bank, the Japanese were never threatened by an economic breakdown. And what money they owed, they owed to themselves.

America has neither of those two comforts. Millions live paycheck to paycheck, depending on credit cards to fill in the gaps. When unemployment rises above 10%… maybe above 15%… they will howl so loud the government will be forced to take desperate measures, which could send the deficit to $2 trillion. Then, crushed under the weight of so much debt, it won’t be long before the feds realize that we don’t “owe it to ourselves.” Instead, we owe trillions to foreigners. Foreign central banks alone hold about $2.4 trillion worth of US government debt. About $10 trillion is said to be the total of all US-based securities in foreign hands. That is a burden that could be easily lightened… if, for example, the dollar weren’t worth quite so much…

Source: The Economy’s Gone into Rehab