Jim DeMint, R-S.C.

This has always been a ridiculous notion, but Geithner’s letter provides the most in-depth and strongly worded rebuttal we’ve heard from the Obama administration so far.

Some key excerpts:

Dear Senator DeMint…

I have expressed my concerns about this idea before, but I will restate them to be clear: this “prioritization” proposal advocates a radical and deeply irresponsible departure from the commitments by Presidents of both parties, throughout American history, to honor all of the commitments our Nation has made…

At its core, your letter is based on an untested and unacceptably risky assumption: that if the United State were to continue to pay interest on its debt — yet failed to pay legally required obligations to its citizens, servicemen and women, and businesses — there would be no adverse market reaction and no damage to the full faith and credit of the United States. Again, this idea is starkly at odds with the judgment of every previous Administration, regardless of party, that has faced debt limit impasses.

“Prioritization” also fails to account for how payments on principal would be made if investors were to lose confidence in U.S. creditworthiness. In August of this year, for example, more than $500 billion in U.S. Treasury debt will mature. Under normal circumstances, investors who hold Treasuries purchase new Treasury securities when the debt matures, permitting the United States to pay the principal on this maturing debt. Yet in the scenario you advocate, in which the United State would be defaulting on a broad range of its other obligations, there is no guarantee that investors would continue to re-invest in new Treasury securities. In fact, some market participants have already indicated that they would be disinclined to do so. As one of the major ratings agencies concluded in a recent report, failure to pay non-debt obligations “would signal sever financial distress and potentially imminent debt default,” prompting the U.S. sovereign rating to be placed on “Rating Watch Negative.”

If investors chose not to purchase a sufficient volume of new Treasury securities, the United States would be required to pay the principal on maturing debt, and not merely the interest, out of available cash. Yet the Treasury would be unable to make these principal payments without the continued confidence of market participants willing to buy new Treasury securities. Your proposal assumes markets would be unconcerned by our failure to pay other obligations. But if this assumption proved incorrect, then the United States would be forced to default on its debt.

Geithner is undoubtedly correct on this. As he notes elsewhere in the letter, the U.S. government is currently is borrowing 40 cent on every dollar. Without an agreement to raise the debt limit, the government would thus have to cut its current spending by 40 percent. Never mind the fact that spending cuts on that scale would immediately plunge the economy into recession. The fantasy that “market participants” would stand by and watch such the U.S. government commit fiscal suicide without running for the hills screaming in holy terror represents new heights in GOP ludicrousness.

In the past, it’s always been easy to dismiss Jim DeMint as a resident of the extreme right-wing of the Republican Party — and therefore unrepresentative of mainstream reality. But right now, in a political climate in which Michele Bachmann is considered to have a legitimate shot at winning the Republican nomination for president, it’s much harder to find an oasis of complacency from which to watch this madness.

While I am skeptical of the chances of a politician so far out on the right-wing extremist edge winning the presidency, I still think, on purely economic grounds, we should probably be relieved at the news. With the possible exclusion of Rand Paul, DeMint is probably the Senate’s most vociferous advocate of big spending cuts, executed instantaneously. In last week’s flurry of 2012 budget votes, he was a supporter of the proposal backed by Pennsylvania Senator Pat Toomey, which, along with supposedly balancing the budget in nine years,  would also cut around $250 billion in non-defense discretionary spending immediately.

That’s what the Tea Party wants, but if the Tea Party got what it wanted, the U.S. would be staring directly into the depths of a deep recession. Each day that passes delivers yet more data about the state of the U.S. economy telling us that a sudden turn to austerity is exactly the wrong medicine for what ails us.

Wednesday delivered two sobering economic reports. First, the ADP survey of private payrolls counted only 38,000 new jobs in May. The ADP report isn’t the most reliable predictor of the more widely watched government-compiled jobs report, but the sharp decline from recent months fits with everything else we’ve been hearing about the economy for the last several months. If significant cuts to government payrolls are tacked on, there’s a real possibility for a very bad number when the Bureau of Labor Statistics releases its labor report this Friday.

Following close on the heels of the ADP report came a dour snapshot of the manufacturing sector. The Institute of Supply Management reported that its index of factory activity fell dramatically in May.

With a 9 percent unemployment rate, a slowdown in job creation is bad news that doesn’t need belaboring. But the news from the manufacturing sector might be even worse, as it suggests that one of the few real overperforming sectors in the U.S. economy is already losing steam.

It is becoming very difficult to deny the obvious. The U.S economy is stalling out, and neither the White House nor Congress seems to care. Instead, Washington is haggling over the terms of another budget deal that is all but guaranteed to subtract even more demand from the economy — which is exactly how a stall becomes a dive.