'Dr. Doom' Zeroes In On Inflation

"It has allowed them to get away with inflating the money supply longer, but ultimately the market is smarter than that," says Paul. "The markets are insisting now that there are too many dollars out there. They've shifted away from financials into harder assets and commodities. The government just can't hide what is really going on."

Meanwhile, China also has an inflation problem and its economy has been hot for years, but Schiff points out that the Chinese government has also been inflating that nation's money supply by 20% to 25% a year. He says China is using inflation to maintain the value of the greenback.

"The Fed prints a bunch of money, and American consumers take the money and buy Chinese goods at Wal-Mart (WMT Quote)," says Schiff. "Chinese manufacturers earn all these dollars and they want to get rid of them, so the Chinese government intervenes in the currency market and buys up all those dollars. Otherwise, the value of the dollar would plummet. The Chinese government buys all the dollars with the yuans they print, so because we print all these dollars, we're forcing the Chinese to print yuans."

In essence, Schiff says the U.S. is exporting inflation to China as well as Saudi Arabia, Japan and many other countries. The European Commission recently cut its forecast for euro-area economic growth and predicted inflation will accelerate to its fastest pace since the currency's debut. At the same time, pressure is growing on the European Commission to lower interest rates.

"When the Chinese finally stop printing all these yuans and let the dollar collapse, Chinese inflation will come to a halt, but U.S. inflation will then kick into high-gear because the dollar will fall like a stone and prices will move up very rapidly," says Schiff. "It's a very dangerous situation to hold U.S. currency because prices are propped up by governments around the world."

To prevent the U.S. economy's Titanic from hitting that iceberg, Schiff says the Fed needs to stop steering the ship away from the rocks.

"The government needs to stop creating inflation, restrain growth in the money supply and move interest rates up to discourage borrowing and encourage savings and restore value and integrity to our money," says Schiff. "To simply try to postpone economic pain that this will cause by creating inflation is the wrong approach. We need to allow a recession to run its course and let the free market purge the excesses and imbalances out of this economy. We're going to have to alter the course we are on eventually, and the longer we wait to do it, the worse it's going to be."