While investors are eagerly waiting to hear what the final economic stimulus package will include, author Peter Schiff, who predicted the recent housing and stock market collapses, has been issuing dire warnings about whatever version of the plan is approved In an interview with Yahoo! TechTicker’s Aaron Task, Schiff says passage of the stimulus plan will do “the exact opposite of what President Obama is saying,” referring to Obama’s statements about disaster following if the bill isn’t passed. “If we don’t act,” Schiff contends, “it’s still going to be terrible. But if we do act, it’s going to be an unmitigated disaster. ”

Schiff says that the stimulus package only compounds the problem because the government ends up taking over the borrowing binge from tapped out consumers, only continuing the “phony American economy” that is now built on borrowing and spending. For a recovery to occur, Schiff says that phony economy needs to collapse.

“We have to let that foundation collapse so we can replace it with a more viable one,” he says, comparing the current system to the country’s version of the Ponzi scheme run by Bernard Madoff. “We need to build an economy on underconsumption, on savings, and on production.” Doing so will be difficult Schiff says, noting that allowing such a collapse would mean a “very severe recession”. But, he notes, “That’s the price we have to pay for years of reckless borrowing and spending. The government has to fess up, level with the American public, and let them know this is going to be tough.”

Savings rates need to go up, and spending and borrowing rates down, Schiff says, so that capital can be freed up for the private sector. If that doesn’t happen, Schiff says we’ll see a hyperinflationary depression worse than anything we’ve seen before.

The next key crisis, Schiff says, would be the bursting of the bond market bubble, which could result in the U.S. government needing a bailout. He sees this unfolding in 2009 or 2010, and says that if the government doesn’t raise interest rates to address this issue, we could see not only inflation, but the kind of massive hyperinflation that Latin American countries have dealt with.