The deposit guarantee prevents the banks from collapsing because otherwise it would be in the individual interests of each customer to withdraw their funds. It is because of the deposit guarantee that the economy does not collapse.
Without the deposit guarantee everyone would withdraw their funds and there would be massive deflation...
It is because of the guarantee that banks are able to keep "lending" as their credit is unaffected by poor loans. Their credit is inviolable in the same way as State debt in a fiat economy. Why not trust a risky bank with your deposits? Bad loans do not prevent people from using the bank for their deposits. People still trust a bank that has made risky loans because of the (State) guarantee. The bad loans do not affect the trustworthiness of the deposits...
The deposit guarantee enables risky lending and the banks don't care because they are personally making profit, even if the company is insolvent. The bankers cause inflation but don't care about the credit of their debt... The deposit guarantee is a license to cause inflation. Inflation arises from the deposit guarantee. The deposit guarantee enables the banks to take excessive risks because people then don't take their funds out of the bank. The risks (loans being made to otherwise bad credit) are caused by the deposit guarantee. It means people get loans that otherwise wouldn't. It causes a reduction in purchasing power of the remaining banknotes; inflation.
Inflation is a consequence of the deposit guarantee because repeated monies being deposited creates more bank deposits. Bank deposits increase as a consequence of the guarantee, it makes deposits more valuable than they would otherwise be; they would otherwise be worthless in comparison to cash. It makes the deposit similar to cash and creates extra money.
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