'Dr. Doom' Zeroes In On Inflation

With oil at $100 a barrel and stagflation in the air, Dr. Doom is at it again.

Peter Schiff called dot-com mania a stock market bubble early in the 1990s. He predicted the U.S. housing blow-up years ago. He called the 2003 deflation scare bogus, he recommended oil at $30 and he's been bullish for at least a decade on gold and other commodities that are hitting record highs.

Now, with Wall Street clamoring for lower interest rates to prevent a meltdown in the world's financial markets, Schiff -- who earned his nickname and antipathy from Wall Street peers for his dire prognostications -- is playing the contrarian again. He says the Federal Reserve should raise rates dramatically to prevent a catastrophic outbreak of inflation. If he's right this time around, we're all in trouble.

"The people who are saying that inflation is not a problem are the same people who have constantly had the economy and the investing landscape wrong, and now, they're wrong once again," says Schiff, head of Darien, Conn.-based broker-dealer Euro Pacific Capital and the author of Crash Proof: How to Profit From the Coming Economic Collapse. "I've gotten it right on all my forecasts. If I'm saying something now, it should be given much higher credibility than those people who have been wrong so consistently and for so long."

The notion that inflation is on the rise has gained credibility lately, with the government's consumer price index climbing 4.3% year over year in January -- its highest reading in over two years. Inflation has long been running above the Fed's perceived comfort zone and, coupled with slowing growth, has some even raising the specter of 1970s-style stagflation. Fed officials have repeatedly sounded warning bells about inflation, but nevertheless, the central bank has slashed its key rate target by 225 basis points since September with a stunning 125 basis points of that move coming in January alone.

The Fed seems willing to flirt with inflation in order to cushion the fallout from a persistent credit crisis that has crippled the world's financial markets for months and threatens to descend into a nasty, consumer-led recession amid the largest declines in U.S. home prices since the Great Depression. Most market watchers say that a likely slowdown in the economy will dampen inflation on its own, so the Fed should now be focused on cushioning the effects of recession with low interest rates.

Schiff calls the notion that slow economic growth will contain inflation "baloney." He points to Zimbabwe, where the national currency just suffered its biggest single-day drop in value ever, even while the country muddles through a 10-year economic slump.

"Obviously, if a weak economy took care of inflation, they would not have any inflation in Zimbabwe," says Schiff. "The greatest inflations throughout world history have come during periods of economic weakness. Economic growth is actually the best antidote for inflation. Real economic growth is a function of increased productivity, and because more is being produced in a growing economy, prices tend to fall. In a weakening economy, there is a decline in the supply of goods available for sale, so you see the biggest increases in prices."

It's hard to compare the U.S. economy with Zimbabwe's, but the last serious inflation scare here does jibe with Schiff's analysis. It came in the 1970s, at a time of economic malaise and high unemployment. With inflation running roughly where it is at now, President Richard Nixon judged it to be such a big problem that he took the disastrous step of imposing wage and price controls on the economy. Finally, Fed chairman Paul Volcker in the early 1980s was forced to raise interest rates into double-digits, despite howls of protest on Wall Street.

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