Modern bank-centric economies are money-hungry beasts that can get quite grumpy and even out of hand when starved of cash flow.

The domestic economy has been a happy place for decades, except for a brief spell of angst during the global financial crisis, but some rare signs of grumpiness have developed over the past few months.

Like some other economic measures defying conventional theory, it has most economists perplexed.

The three-month bank bill swap rate, the most liquid indicator of the cost of domestic wholesale funding, has risen to 2 per cent.

That has occurred despite the official cash rate remaining unchanged at 1.5 per cent for the past 18 months and the Reserve Bank clearly indicating no increase was on the cards at least until the middle of next year.

“The cost of money is impacting borrowers, from governments to corporates, and is now a mainstream subject,” ANZ strategist Martin Whetton said.

And unfortunately for homeowners and savers they will be the ones paying for the increase in costs of the lenders, with deposit rate cuts of 20 to 30 points and similar rises in mortgages expected if the pressures don’t ease soon.

Much of the blame has been pinned on rising US borrowing costs and a shift away from deposits by self-managed super funds, but I’m afraid that cannot fully explain the funding squeeze.

The cost of funding is rising because there is suddenly a real shortage of money-like instruments in the banking system, which is concerning because according to accounting principles the system should always be balanced.

Any investment preference shift away from short-term liquid investments should soon be arbitraged out by the big banks if it were a temporary funding anomaly.

Unless, of course, it’s not temporary and instead a real shortage because banks and other second-tier lenders are writing-down “assets” in the event of borrower default, thereby destroying money in the process, or to a lesser degree, people are stashing billions of dollars of bank notes under the mattress, neither of which are positive for the economy.

Giving credence to rising defaults, the Australian Financial Security Authority reported this week that personal insolvencies more than doubled to 5.6 per cent over the June quarter, the most since 2008.

Not all those in need of funding can access it at the same rate as the big four banks with higher credit ratings do, but the fact that what should be a highly liquid and efficient BBSW rate is rising indicates an overall shortage that is affecting the major banks at the core of the financial system, too.

Even if there were a clear shift in investor cash flow to speculative assets such as stocks, for every buyer there is a seller who receives cash that simultaneously returns to the banking system deposit base.

The same holds for the buying and selling of houses, cars and business equipment, even if it is conducted via a foreign exchange transaction.

In all the above financial exchanges only the holder and the amount of cash they receive changes, not the total amount of liquid dollars in the banking system.

Without cash in the system there can be no buyers, and with a shortage there is less ability to spend and invest.

So, yes, banks and companies tapping offshore funds are paying out more cash to offshore lenders as US rates rise, but the currency shifts in value to account for that without dollars being “lost” to the system because for every dollar seller there has to be a buyer.

The extent of the crunch was underscored four weeks ago when the Reserve was forced to undertake a “rare” $500 million second round of funding in one day to satisfy demand over the financial year-end.

Reserve governor Philip Lowe has downplayed the shortage, just as US Federal Reserve officials did for a similar US dollar shortage all throughout 2007 and most of 2008. But make no mistake: a funding shortage is a far from normal development in a steadily growing economy.

HSBC economists have noted that broad “base money” growth has essentially collapsed from an annual pace of 7.8 per cent a year ago to a 25-year low of just 2.5 per cent.

What was happening just over 25-years ago? The last recession when people and companies were defaulting.

HSBC says the deposit numbers show that the slowdown has been because of falling growth in business and pension fund deposits.

The explanation is that businesses are using retained earnings to fund investment and hiring, rather than borrowings.

But it ignores the accounting reality that net-deposits in the banking system should remain relatively constant each day if credit-money creation was increasing enough.

The real problem is that total credit growth is edging below 5 per cent, a level that could well be equal to, or less than, the average weighted-cost of national borrowing. That would mean total interest costs and defaults combined were eating up most of the money freshly created in the banking system, leaving an overall cash-flow shortage for borrowers to service debt.

It is no coincidence that the slump in base money began around the same time as the crackdown on the reckless lending that drove east coast housing prices higher, forcing “the bank of mum and dad” to become the second-biggest source of funding in the country after the major lenders.

The Reserve and most bank economists dismiss the BBSW signals in light of the steady, yet underwhelming GDP growth and employment rate.

No doubt business conditions have been good for companies, helped by government spending, the rebound in commodity prices and record high immigration rates over the past five years.

But the US economy also grew in the June quarter of 2008, yet two months later global financial markets were in a crisis.

If banks get a whiff that some smaller players in funding markets are starved for cash, wholesale funding trust could plummet and risk premiums soar, just as they did in 2008.

There’s no sense of panic yet, but if banks insist on retaining their big slice of the interest pie by increasing mortgage rates, and companies don’t soon pass on a share of the good times to employees via solid wage increases, all bets will be off.