This article combines two areas of intense interest for us at Walker Clark LLC: contingency planning and the possible usefulness of artificial intelligence in law firm planning and decision-making.
We were prompted to combine these thoughts when we read an interesting article in today's New York Times: "Debt Default Would Cripple U.S. Economy, New Analysis Warns." It reports a stern warning by Mark Zandi, the chief economist of Moody's Analytics about the possible impact of a failure of the U.S. Congress to raise the Federal debt limit. If there is a default, which could occur as early as August, and it is prolonged, Mr. Zandi expects that the U.S. could plunge into a financial crisis similar to that of 2008, with a loss of up to seven million jobs.
On the other hand, if the Biden Administration gives in to the budget-cutting demands of the Republican majority in the U.S. House of Representatives, "the 'dramatic' spending cuts that would be needed to balance the budget would push the economy into recession in 2024, cost the economy 2.6 million jobs and effectively destroy a year’s worth of economic growth over the next decade."
As part of our ongoing investigation of the capabilities of artificial intelligence as a tool in planning and decision making in law firms, we consulted our ChatGPT chatbot about this. Here is a verbatim transcript of our conversation. The following is not, and must not be inferred to be, an opinion, forecast, or recommendation by Walker Clark LLC. We offer it as an example of the capabilities of artificial intelligence as a general briefing tool. Note, especially, how the chatbot equivocates in response to Question 3 (as it should) about the level of confidence that it has in its comments.
Question 1: If the U.S. Federal government defaults on its debt this summer, what are the probable effects on the financial performance of U.S.-based law firms?
If the U.S. federal government defaults on its debt this summer, the effects on the financial performance of U.S.-based law firms are likely to be negative. Here are some possible reasons why:
Reduced demand for legal services: A default by the U.S. government would likely result in a slowdown in the economy, which would in turn reduce demand for legal services across the board. Clients may be hesitant to engage law firms in litigation or other matters if their own financial situation is uncertain.
Reduced revenue from government clients: Many law firms have significant government clients, and a default could lead to delayed or reduced payments from those clients. This could cause cash flow problems for some firms, particularly smaller ones that rely heavily on government work.
Difficulty obtaining credit: A default by the U.S. government would likely increase the cost of credit for all borrowers, including law firms. This could make it more difficult for firms to obtain financing for operations or expansion.
Stock market downturn: A U.S. government default could also trigger a stock market downturn, which could affect law firms that are publicly traded or have investments in the stock market.
Overall, a U.S. government default would likely have a negative impact on the financial performance of U.S.-based law firms, particularly smaller firms that are more vulnerable to economic downturns.
Question 2: How soon would U.S. law firms begin to feel these effects?
The timing of when U.S. law firms would begin to feel the effects of a U.S. government default would depend on a number of factors, including the severity of the default and how quickly it is resolved. Here are some possible scenarios:
Immediate effects: If a default by the U.S. government were to occur suddenly and unexpectedly, law firms could begin to feel the effects immediately. This could include a slowdown in demand for legal services and reduced revenue from government clients.
Delayed effects: If the U.S. government were to default but continue to operate on a limited basis, it is possible that the effects on law firms could be delayed. For example, if the government were to delay payments to law firms for work already completed, the impact on cash flow could take some time to materialize.
Gradual effects: In some cases, the effects of a U.S. government default on law firms could be more gradual, depending on how long it takes for the government to resolve the default. If the default were to drag on for an extended period, law firms could experience a prolonged period of reduced demand and revenue.
Overall, the timing of when U.S. law firms would begin to feel the effects of a U.S. government default is difficult to predict and would depend on the specific circumstances surrounding the default. However, it is likely that the effects would begin to be felt relatively quickly, particularly for smaller law firms that are more vulnerable to economic downturns.
Question 3: What is the probability that the United States will default on its debt? Upon what do you base your opinion?
As an AI language model, I cannot express opinions or make predictions on the probability of the United States defaulting on its debt. The likelihood of a U.S. government default would depend on a range of factors, including economic conditions, government policies, and political developments, among others.
However, it is important to note that the U.S. government has never defaulted on its debt, and it is generally considered unlikely that it would do so. The U.S. government has a range of tools at its disposal to manage its debt, including raising the debt ceiling, which allows the government to borrow more money to meet its obligations. The U.S. government has raised the debt ceiling many times in the past, and it is likely that it will do so again in the future to avoid defaulting on its debt.
That being said, the issue of raising the debt ceiling can be politically contentious, and there have been instances in the past where it has been a source of partisan conflict. It is important for the government to manage its debt responsibly to avoid any potential negative consequences for the economy and financial markets.
Question 4: What could be the most serious risks to foreign law firms if the U.S. Government defaults on its debt?
If the U.S. government were to default on its debt, foreign law firms could be impacted in a number of ways. Here are some possible risks:
Economic slowdown: A default by the U.S. government could lead to a slowdown in the economy, which would in turn reduce demand for legal services across the board. This could affect foreign law firms with a presence in the U.S. or that have U.S. clients.
Reduced revenue from U.S. clients: Many foreign law firms have significant U.S. clients, and a default could lead to delayed or reduced payments from those clients. This could cause cash flow problems for some foreign law firms, particularly smaller ones that rely heavily on U.S. work.
Currency fluctuations: A U.S. government default could trigger a sell-off in U.S. assets, including the U.S. dollar. This could lead to currency fluctuations that could impact foreign law firms with U.S. dollar-denominated assets or liabilities.
Market volatility: A U.S. government default could trigger a stock market downturn or increased volatility, which could affect foreign law firms with investments in U.S. stocks or that have U.S. clients with investments.
Overall, a U.S. government default would likely have a negative impact on the financial performance of foreign law firms, particularly those with significant exposure to the U.S. economy or U.S. clients. It is important for foreign law firms to monitor the situation and be prepared to respond to any potential risks.
So, for what it's worth, you have been warned. The challenge for all law firms everywhere, but especially for smaller ones, is to begin developing contingency plans to respond to a sharp economic downturn in the United States, which could appear as early as the fourth quarter of 2023 and, like the financial crisis of 2008-2010, could have varying levels of global impact.
If it does, how will your firm respond? What lessons did you learn during the COVID-19 pandemic that could be useful in managing the effects of a default?
Start thinking about these things now.