'Dr. Doom' Zeroes In On Inflation

Now, Volcker is one of the most admired public servants in modern U.S. history. His successors at the Fed, however, are trying to use easy credit to head off a financial crisis and economic slowdown that many observers say was at least partly created by the Fed's loose money policies in the first place.

"The government doesn't want to admit that the real cause of inflation is the government itself," says Schiff. "They raise revenue with inflation rather than taxing citizens for the money they wish to spend. They create the money out of thin air by printing it. When they do that, they take purchasing power away from the citizens by debasing the currency."

Such views are rarely voiced on Wall Street, but with the value of the U.S. dollar in sharp decline while gold prices soar to new record highs, it's clear that some investors are buying into them. Meanwhile, oil prices have crossed over the once-unthinkable $100-mark, and Schiff says it's because the Fed is printing more money than Exxon Mobil(XOM Quote) has pumped crude.

"The reason why Wall Street goes along with the Fed is because Wall Street prefers to pretend that everything is good because they're in the business of selling stocks and bonds, and they're likely to sell more stocks and bonds if investors falsely believe that the economy is sound," says Schiff. He notes that polls have shown for years that voters are displeased with economic conditions, despite the rosy view of the stock market and the economic data used on Wall Street, and he attributes the disconnect to the effects of inflation.

Schiff's many critics only begrudgingly acknowledge he has made some good calls. Michael Holland, chairman of Holland & Co., concedes that Schiff looks prescient now amid the downturn in the housing market, but he points out that investors who listened to Schiff throughout the recent bull market missed out on some attractive returns in the stock market.

"A broken clock is right twice a day," says Holland. "If you say things are going to be bad long enough, eventually you're going to be right."

But Schiff also has earned a legion of fans, including U.S. Rep. Ron Paul (R., Texas), who in January tapped Schiff as economic advisor to his longshot presidential campaign. While he has lost handily at the polls to Arizona Senator John McCain in the primaries, Paul's core message of monetary policy reform has garnered a huge and loyal following on Google's (GOOG Quote) YouTube, and he raised far more money in the last three months of 2007 than any other Republican candidate.

"The pressure is always there on the Fed to create more inflation by politicians, Wall Street leaders and those who have made mistakes by participating in over-borrowing and over-investing," says Paul. "They never talk about inflation in the true sense of the word. They always talk about the need to spend more money to stimulate the economy or lower interest rates to help out Wall Street and the markets. What they're really saying all the time is crank up the printing presses, crank up new credit and crank up inflation."

Paul rankles some observers as a crank and a conspiracy theorist, but others view him as a rare voice of honesty in Washington that was unfairly silenced by News Corp. (NWS Quote), when its Fox News Channel left him out of its Republican debate before the New Hampshire primaries without explanation. He attributed that to a corporate media that doesn't like his message.

At the core of that message is an inherent distrust of the Fed and U.S. monetary policy. Paul cites the Fed's decision in 2006 to stop reporting M3, its measure of the total money supply in the U.S., to deflect the public's attention away from its printing of new dollars at an increasing rate. At the time, the Fed explained it made the move because M3 did not play a role in the monetary policy process "for many years" and no longer was worth the cost of collecting the data and publishing it.