You mean that didn’t fix anything?

The Dow Jones Industrial Average lost 512 points today, down 4.31%. The S&P 500 is down 4.78%. NASDAQ down over 5%. That’s on top of a 2+ percent loss on Tuesday. I can’t blame it all on the debt ceiling deal, but that’s a major contributor. Let me explain why.

Investors hate uncertainty. When they don’t don’t know what Congress is going to do, investors get nervous and they tend to flee from stocks like rats deserting a sinking ship. During the run-up to Tuesday’s historically idiotic culmination of the most recent tempest in a teapot, investors believed that Congress would do something to resolve the issue. Instead, Congress passed and the President signed a bill that just kicks the can down the road a bit, which is what they’re best at. They’ve put the whole thing off until November. Investors, now with no idea of what train wreck Congress is going to perpetrate next, are pulling their money out of the market. They’re going to sit on it for a while (a week, a few months, a year or two, who knows) until they can figure out what the new rules are.

It’s fitting that the new legislation was called the Debt Control Act of 2011. Congress excels at passing legislation that does exactly the opposite of what one would expect, based on the bill’s title.

The stock market is not the national economy. Often it’s not even a good indicator of the national economy. But it acts like the national economy in many ways. In particular, the primary driver of the stock market is investor sentiment, much as the primary driver of the national economy is consumer (and, to some extent, producer) sentiment. If people think that things are getting better, they spend money much more freely. When people think things are getting worse or not going to change, they tend to sit on their money and only let go of it when absolutely necessary.

Recent polls show that most people believe that things aren’t getting better. That’s due in large part to their belief that government drives the economy–a belief reinforced by the mainstream media, either on purpose or as a side effect of superficial reporting. Both major political parties, and most of the smaller parties count on that belief and do everything in their power to reinforce it. It’s wrong, but it’s beneficial for some that most believe it to be true. And it’s convenient for the masses, because it relieves them from any responsibility.

When people armed with that belief see Congress wasting months on a spending bill that ultimately amounts to more of the same, they are not going to be filled with confidence. A poll taken yesterday shows that of the people polled, 41% believe that the new Debt Control Act will make the economy worse. 17% believe it will make it better. And almost one-third of respondents said that it won’t make a difference.

It looks to me like 83% of people are going to sit on their money until they see what Congress does next.

It’s kind of funny that back when things were going well, people were spending money they didn’t have on things they didn’t need, because they thought they could make it up in the future. Now, many of them are reluctant to buy things they really need with money they already have because they’re unsure of how long their money will last. This probably points to a basic flaw in the way that most people see the world.

As long as the American people believe that government controls the economy, we’re going to see longer periods of contraction or stagnation, and fewer and shorter periods of growth. My conclusion, based on 30+ years observing Congress in real time, and my reading of history from prior years, is that government can create short-term bubbles at the cost of long-term problems. Government policies that use borrowed money to target certain industries or certain groups of people usually result in short-term gains for those affected areas. But those policies almost invariably lead to unintended negative consequences, particularly when the temporary programs end and the industries that were built up to take advantage of those programs fail.

“Government money” in the economy, either through higher taxes or borrowed money, is like taking amphetamines. It’s go, go, go until the drugs wear off, followed by a crash. Our economy is now suffering from the equivalant of amphetamine dependence, where it takes larger and more frequent doses to get any kind of reaction.

As with amphetamine dependence, whereas decreasing or eliminating government’s role in the economy would be a Good Thing, doing so will involve some very painful withdrawal symptoms. Unfortunately, I doubt that we have the national will to suffer through that pain, even though the result would be a much more stable and robust economy.