Here is a short blog at King World News by Rob Arnot. I think Rob is a pretty sharp guy but he got me to thinking about something he said that I question.

One thing Rob states in this blog is:

"So when we see gold soaring, what that’s telling you is one of two things.  Either the value of the currency is being debased or it means that people are frightened by the government policies and they are pulling money out of the productive economy.  Both of those, of course, are bad news.”

The part "they are pulling money out of the productive economy."  is the way I used to think about gold. Gold takes money out of circulation. Here is the thought process. If I have $10,000 in a bank account the bank can loan that out and create somewhere around $100,000 new money by the fractional reserve system depending on their reserve requirements. If I instead take that $10,000 and write a check for gold, the gold can not be "multiplied" by fractional reserve banking. I think this is where Rob is talking about " pulling money out of the productive economy"  

Well for that particular bank it would be true and for me it would be true. The bank looses the deposit and I have money tied up in a non-producing asset. That $10,000 worth of gold is "out of the system" or in other words where no one can use it for productive purposes.

But I have had second thoughts. Is that money really destroyed? Or has it just changed hands? I now believe it has just changed hands. I had to pay the $10,000 to someone for that gold. That someone most likely put it in a bank somewhere or spent it on something that will be deposited in a bank somewhere, so the money is still in circulation. Someone else along the chain has that "money" and it goes through the fractional reserve banking system.

So I have changed my mind on the stance that gold cuts down on the multiplier effect of fractional reserve banking. It only changes who or where the effect takes place. The money stays in the banking system, no different than if a person bought a house or some other fixed, non-producing asset.

Anyone see a flaw in my thought process?

John

Edit: After reading Arnot's message again, he may have simply ment buying gold indicated people were pulling "their" money out of the economy. But I still don't see how that would be a bad thing because the money is still circulating in the economy.