Sir Mervyn King, Former Governor of Bank of England. Clive Brunskill | Getty Images

Another major quake in the global financial system is imminent, according to the former governor of the Bank of England, who believes that stretched central banks have taken monetary policy to its limits. "Another crisis is certain, and the failure…to tackle the disequilibrium in the world economy makes it likely that it will come sooner rather than later," Mervyn King has said in his new book, which was exclusively serialized in the U.K. Telegraph newspaper at the weekend. King's tenure ended in 2013 but he oversaw U.K. monetary policy during the 2008 financial crisis and the launch of a £375 billion ($519 billion) quantitative easing (QE) program to help kickstart the country's return to growth.



The former governor spoke of a "disequilibrium" in the world economy becoming increasingly serious. He detailed unsustainably high levels of spending in the U.S, U.K and some other countries in Europe, compared to unsustainably low levels in Germany and China. He believes that this has led to an extraordinarily low level of interest rates which have fueled asset price inflation. "Central banks are trapped into a policy of low interest rates because of the continuing belief that the solution to weak demand is further monetary stimulus," he said. "They are in a prisoner's dilemma: If any one of them were to raise interest rates, they would risk a slowing of growth and possibly another downturn."

The world economy now faces a slow and painful adjustment back to equilibrium, he explained, or could even see stock markets plunge if real interest rates - a lending interest rate adjusted for inflation - start to move back to more normal levels. He added that the "epicenter of the next financial earthquake" was hard to predict but said indebted emerging markets, euro zone fault lines, Middle East tensions or the Chinese financial sector could lead to "cracks in the surface." The new book, entitled "The End of Alchemy", also discusses topics ranging from the euro zone sovereign debt crisis to the bank reforms that have taken place since 2008. He believes Greece should be allowed default on a substantial proportion of its debt burden and devalue its currency in order to regain its economic competitiveness. He also warned against greater political unity within the euro zone suggesting that a "creeping transfer of sovereignty to an unelected center is deeply flawed and will meet popular resistance."