Larry Kudlow

Some supply-siders believe the pronounced rise in the price of gold is a warning of future inflation. They have a point, but at the present it's a weak point.

It is always useful to recall that the collapsing dollar of the late 1960s and '70s, measured as an enormous rise in the dollar-price of gold, heralded the era of hyper-inflation and stagnation -- otherwise known as stagflation. Back then, the gold cover on bank-reserve supplies from the Federal Reserve was broken, and the country was also moved off the Bretton Woods dollar-gold exchange-rate rule. Both of these events combined to totally unlock the monetary spigots. Prices subsequently soared -- including the price of oil, which of course is priced in dollars. (Faint echoes of this have recently reappeared, as OPEC ministers complain of the cheap dollar.)

Even in the late 1980s, in a much smaller way, an unwanted depreciation of the dollar in terms of gold and foreign currencies triggered a mild re-inflation, which temporarily moved back up to 5 percent.

However, when analysts wander through history in search of gold-price reference points that might be consistent with this or that inflation rate, they should resort to constant-dollar gold prices rather than current-dollar prices. Production costs change over time because of shifts in technology, productivity and the world supply of gold. Moreover, economic environments change as tax-rates and regulatory reforms occur. Economies are also influenced by world political events. Constant dollars -- adjusted for the effects of inflation -- give a clearer picture of what's going on.

Today, greater monetary discipline, lower tax-rates, deregulation and rapid technology investments, advances and applications have all led to fantastic gains in output-per-hour productivity efficiencies -- markedly changing the economic backdrop for the better. Over the last two decades, dollar value has improved enormously, while gold prices have plunged.

Inflation, meanwhile, has become virtually nonexistent.

So, when measured in constant 2000 dollars, gold has slumped from $1,207 in 1980 to $260 in early 2001, and has rebounded to $364 today. From this perspective, it seems that all we've experienced is a long secular period of disinflation, which occasionally lapsed into outright deflation -- in part from Schumpeterian technological advances with their associated pressures on lower across-the-board prices, and in part from Fed money-destroying stupidity, such as occurred in 2000-2001.

Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.