You rather proved my point, unfortunately. Web apps are not about "DOM manipulation". They are about delivering no-install applications over the internet. They have historically been about DOM manipulation because that was all they could afford to do performantly (and that only barely at times). As that changes, so does the web. We're getting a ways along this path anyhow (http://code.google.com/p/quake2-gwt-port/ ), just with increasingly fast JS and other tech, but it's only going to grow more.
Replacing the scripting language of a browser does not magically make the applications you describe possible, any more than it's possible to draw high quality vector graphics on a 5250 green screen. You're presuming all sorts of hardware-accelerated graphics, network connectivity, font manipulation and many other fundamental sorts of hardware manipulation that just isn't possible within the confines of (most of today's) web browser.
What you describe is indeed possible, e.g. Silverlight and Air, but putting a new scripting VM in today's browsers is not going to get you there. You're not talking about web applications, you're talking about a new class of web browser.
Are you keeping up with what web browsers are doing lately? They've turned a corner and are burning rubber now that we're increasingly less tied to Microsoft every day, and Microsoft's efforts to hold things back are no longer working. I'm hardly even hypothesizing, you can get demos of many of those things right now.
(Edit: I see that you already mentioned this further down the thread.)