Look out below

Mid-July seems like a long time ago, doesn’t it? When Wall Street rang the opening bell last Monday — literally just 11 days ago — both the Dow Jones Industrial Average and the S&P 500 stood at nearly three-year highs.

As you’ve probably heard, it was not an especially pleasant day for the U.S. markets. The Dow Jones fell over 500 points, and with a 4.3% drop today, it actually fared better than the other major indexes. The S&P was down 4.78%, and the Nasdaq was down over 5%.

To help provide some visual context, here’s a little chart I put together showing the last three weeks watching just the Dow.

That grouping on the left was two weeks ago; the one in the middle was last week; and on the right you’ll see this week so far.

Now, from a political context, this doesn’t exactly help the Republican argument. Two weeks ago, the markets were ignoring the threat that the GOP would cause a deliberate crash. Last week, markets starting falling as anxiety spread. And this week, after learning that the debt-ceiling agreement will take money out of the economy as Republicans demanded, the Dow dropped 760 points in four days.

John Boehner may want to take back that boast about getting 98% of what he wanted in the debt-reduction deal. The claim was exaggerated anyway, but the fact that he said it at all may prove to be politically problematic.

In the larger context, though, it’s tough to draw a straight line between one bad deal out of Congress and a 500-point one-day drop on Wall Street. There’s a larger, global context to these developments, as Ezra Klein explained well this afternoon.

A dramatic gap has opened between the economy as Washington sees it — and wants to intervene in it — and the economy that actually exists. Whatever weak recovery we might have hoped for is being hindered by global commodity prices, consumer deleveraging, fears of flagging demand in emerging markets, earthquakes in Asia, and much more. Globally, it’s been an almost uninterrupted run of crises and bad luck. Meanwhile, Washington just spent two months arguing over whether it would pay its bills or spark an unnecessary financial crisis.

Last week, Congress resolved that question. This week, the markets are tanking. Which suggests that Washington is asking itself the wrong question.

The right question is simple enough to pose: Where will the recovery come from? The problem is that no one has an answer. And as one hopeful hypothesis after another is dashed, the markets are beginning to panic.

Europe is overcome with a debt crisis; Japan is still rebuilding; and China has already experienced its boom and is looking for a soft landing.

The world may want to look to Washington, but all they see is a dysfunctional mess, led by a rabid group of right-wing officials who just spent several months talking about their willingness to cause a national default on purpose, and who will reject with every fiber of their being any effort to create jobs and/or improve economic demand.

I’m trying to think of the right adjective here. Let’s go with … unsettling.