For nine of the last ten days, the Dow has been dropping, concluding with a 500 point drop, our biggest sell-off in two years.

What happened?

A combination of bad economic data from Europe and the US validated the market fears that Western governments lack the integrity to solve problems and meet global economic challenges.

We are witnessing well-informed investors conclude future employment and production in the West is in jeopardy as a result of the governments’ apparent inability to solve problems.  They are seeking to reduce their exposure to the future production of Western countries because it does not appear that these governments can deal with expectations of sustained unemployment and diminished prosperity in a way that is constructive.

“We have broken financial system, and capitalism has been broken in this country for some time,” said Seattle-based hedge fund investor Bill Fleckenstein.  “Folks need to take a step back and realize that this reaction that happened today was not a reaction to the debt ceiling.  We’ve done that dance many times before.”

Data released on Monday showed that manufacturing activity in the US economy is rapidly dropping.  Today Italian bonds blew up on a risk the Italian government won’t be able to pay its debts.  Tomorrow the assumption is that there will be yet another tepid jobs report.

And yet, the US Congress is engaged in an absurd battle about whether air traffic controllers should be paid and our President is planning a fundraising bus tour for his birthday (By the way, happy birthday Mr. President).

Is it any wonder that global investors are skeptical of American prospects for employment and prosperity?  Some people ask, why today?  It’s not like these problems are new.  I think of it as water being heated up.  It’s water until it hits 212 degrees, at which point it turns to steam.

Any other country in this situation would be in trouble.  However, because we print the dollar, which is the global standard (or “reserve currency”), we get a stay of execution.  It’s why despite all of this, our government can still borrow money cheaply.  This ability to borrow is a blessing and a curse.  It’s a blessing because it prevents a more precipitous exit from America and buys us time to fix our problems.  It’s a curse because it enables us to continue on this reckless path.

Let’s hope that this relative market pinprick got someone’s attention at the White House, or on the tour bus.  Because the market’s tendency is to ratchet up the pain for those who fail to recognize its message.

“Over here, [Federal Reserve Chairman] Ben Bernanke stopped QE2 and has convinced people that he has their back,” said Bill.  “Now, they’ve got a gun to his head and the markets are saying ‘give us more QE3 or we’ll melt the markets down by Wednesday.  The markets are going to force the politicians to deal with these problems… we have to admit these things and solve these things.”