International economic expert James Rickards was one of the few people to predict the surprises of 2016 - the UK voting to leave the European Union and Donald Trump's presidency - and he says another financial collapse will come sooner than expected, and worse, it is now beyond the capacity of the central banks to deal with the problem.
Rickards is the New York Times best-selling author of Currency Wars, The Death of Money, The New Case for Gold and his latest The Road to Ruin.
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He's an advisor on capital markets to the US intelligence community and a member of the advisory board for the centre for financial economics at Johns Hopkins University. He's a lawyer, economist and investment banker.
Rickards says we came close to collapsing the entire financial system in 1998 and then again ten years later in 2008 when bailing out the system cost economies and taxpayers a fortune, now almost ten years on the system is bigger and as unstable as ever and he argues when it collapses it is beyond the capacity of central banks to fix.
He likens current state the global financial system to a mountainside before an avalanche.
"If there's an avalanche who do you blame - the snow flake or the system? There will always be another snowflake. There's always some catalyst but what matters is the instability of the system."
James Rickards Photo: supplied
In 1998 the catalyst was currency failures in Asia, in 2008 junk mortgage derivatives. So what lessons have we learned from those two events. He says none, in fact we've made matters far worse. So what should have happened?
"First of all you would ban most derivatives, they serve no purpose other than enabling banks and dealers to steal money from their customers through opaque pricing and insider pricing - they are extremely dangerous."
Secondly, he says, commercial and investment banking should be kept separate.
"They did the opposite of what they should have done. In 1999 they [Congress] repealed the Glass Steigal Act which separated investment banking and commercial banking. For 65 years it worked brilliantly, in 1999 the US congress decided they were smarter than the congress of 1933 repealed it.
"So banks went out and originated garbage loans and securitised them and sold them to their customers - it came as no surprise that 8 years later we had another crash."
To make matter worse he says in 2000 Congress relaxed the laws governing derivatives.
"The policy response was to do the exact opposite of what the lessons would have taught you."
He says national economies now have nothing left in the armory because of the sheer scale and interconnectedness of financial markets.
"In 1998 the banks bailed out a hedge fund, in 2008 the central banks bailed out Wall Street, in 2018 who's going to bail out the central banks? Each bail out gets bigger than the one before."
He says only two things can happen in another panic: the international banking system and markets are frozen or a new kind of liquidity comes from the IMF issuing Special Drawing Righs (SDR) effectively a global currency.
"At that point you have a completely different world. We keep playing with fire but we keep building the fire bigger, the next one is going to burn down the system as we know it."
He uses complexity science to help understand the capital system.
"You can apply it to capital markets and get extraordinary results. All our policy makers are using a lot of junk science, it's no surprise that they keep getting their forecasts wrong and blow up the system every ten years."
He says the risk lies with "an exponential function of scale".
"If you double the system you don't double the risk, if you double the system you increase the risk by a factor of ten. It goes up faster than the rate by which you're expanding the system.
"Today the five largest banks in the US are bigger than they were in 2008 and their derivative books are much larger."
He goes back to the avalanche analogy to explain how to reduce risk.
A ski resort uses avalanche cannons to break up a risky build up of snow before it becomes a catastrophe, he says.
"You descale the system before it does harm, so you would break up the big banks and you can save the system. Is that likely to happen? Absolutely not because the banks own the governments."
The Road to Ruin is published by Penguin Random House.
