Does that imply that US society becomes disfunctional if there's no access to debt? What's making it impossible to function within the existing budgets and causes this huge dependency on borrowing with cheap rates?
Those who invested in affected businesses or capital goods with inflated prices due to easy credit will find those investments collapsing in value.
Eventually, the economy could restructure into a more sustainable form, where investments, business sizes and training were aligned with the new state of the economy. But a pain period is not really avoidable, other than by relowering interest rates. The longer interest rates are kept low, the longer and more painful the transition.
How does that work? Are they regularly covering their payroll with loans?
Most significantly-sized businesses rely on credit week-in week-out, and tend to implode very quickly if the market turns off the tap.
Is there a lender that decides to stop making payday loans and buy T-bills instead?
At the level of individual lenders, this looks more like all institutions shifting slightly toward lower-risk lending across the board than any individual lender choosing to buy t-bills instead of making payday loans. But then again, that's exactly what "maintaining higher capitalized operating reserves" means.
Ever heard of Keynes and his liquidity preference theory?
Ever heard of Wolfgang Stützel and his book about balance mechanics?
It's pretty obvious. The person with the money gets to decide and they are allowed to decide to not decide at all.
Since one person's credit is another person's debit, the credit side determines indebtedness. Positive money balances determine how much debt there is in the economy and since people have a preference for holding money balances, those money balances keep ballooning and correspondingly, indebtedness must go up.