Don’t worry, readers. The banking crisis is under control. We don’t need to fear another crisis caused by another bank run. The authorities are monitoring the situation closely. And they won’t let anything bad happen to their top political donors.

Wouldn’t it be nice if the central bank bailed out you and I when we’re facing a liquidity but not a solvency issue? In other words, when we can’t pay our debts as they come due, but we will be good for the money if given some time.

Of course, during the 2008 crisis governments and central banks did far more than that. We saw outright bailouts to address solvency, not just liquidity problems at banks. They made bad investments and were rewarded with government money.

But no, central bankers don’t rescue us, despite the fact that they could print the money to do it. Heck, when prices start to rise, squeezing the cost of living, central bankers actually make the problem even worse. They hike interest rates, adding to the upward pressure on the cost of living…

The thing is, there’s actually a rather good reason why banks do need regular rescues. They even need a dedicated institution like a central bank to stage those rescues. It’s because banking is a confidence game, by its very nature. There is no other business like it.

If you deposit summer garden furniture at the local storage company, you can come and pick it up anytime you like. The storage company can’t go and lend that furniture out in the hope you don’t show up to claim it. Your right to pick up what you deposit whenever you like precludes the storage company lending it out.

But banks can take deposits and use them for their ordinary business of lending. The hope is that depositors don’t all show up at once to demand their money. Because, if they do, the bank can’t always pay up. Either not fast enough, or not all the money for everyone.

In such a situation, the depositors who show up first get all their money out. Those who show up after the bank regulators get what the politicians decide. And so it becomes a race, as soon as confidence is lost.

The recent bank failures in the US have served as the latest in a long line of periodical reminders of this fragility. But those failures are symptoms of the underlying problem: deposit flight.

“Depositors have withdrawn €214bn from eurozone banks over the past five months, with outflows hitting a record level in February,” reports the Financial Times. February featured a €71.4 billion rate of withdrawal, the biggest on record.

It’s not just the EU, of course. US banks lost $500 billion over the past year. In the UK, companies withdrew £20.3 billion, but households increased deposits by £3.5 billion.

This matters because it implies that banks must be selling something in order to meet the deposit outflows. They must be selling government bonds, for example, to raise the money to redeem customers’ deposits.

But government bonds have crashed in price over the last year and a half. Banks may be selling them at a significant loss. And that’s how they get into trouble.

But what’s going on with deposits? Why is deposit flight happening at all?

It can’t just be that everyone suddenly expects a bank run for no apparent reason. Sure, that brings the problem to a crisis. But what caused the initial outflows?

One explanation is that things are normalising after the pandemic. Cash is back and people are using money to invest, spend and repay debts.

This would be good news. If it’s true.

But there’s another possibility which is churning around my stomach. What if people are avoiding holding money because of inflation?

There’s nothing worse than holding money when the value of money is falling by double digits a year. And so, perhaps deposits are falling because people are holding less money in their accounts. They’re buying anything they can get their hands on instead.

This sounds a little odd, but if many people make many small changes to their lives, it could have a significant impact on the amount of deposits held at banks.

For example, if people stop saving for a rainy day, as many did during the pandemic, then money balances fall. When we live paycheque to paycheque, or credit card to credit card, this means total deposits evaporate.

If people push forward their consumption to escape rising prices, thereby holding more non-perishables in their pantries and spare parts in their garages, that drops money balances again.

Retirees can decide to hold less cash too, by selling less of their investments more often instead of larger chunks.

You get the idea. When the value of cash is steadily falling, then people hold less of it. This withdraws a source of funding for banks.

Faster spending and less savings kept in the form of money is also known as the velocity of money. And it’s a primary cause of inflation as much as it is a symptom.

You see, if people want to get rid of money as fast as possible in order to avoid being the one holding the Old Maid of inflation, this pushes up prices because people spend more and more often.

If inflation accelerates, people want to get rid of money so desperately that it becomes worth ever less. Until it’s worthless.

Which governments solve first by adding zeros to bank notes and then taking them away…

My point is that the deposit flight we’re seeing could be a symptom of inflation and a future driver of it.

Which is a completely useless conclusion, really. We don’t know whether deposit flight means a banking crisis is underway, which is severely deflationary, an economic recovery that’s begun, or the onset of an inflationary bout driven by the velocity of money.

At least you’ll understand what’s going on, whichever of the three it is…

Nick Hubble
Editor, Fortune & Freedom