Major western countries could go bankrupt in the wake of the current financial crisis, one of Britain's most celebrated historians has warned, predicting riots in major cities by the end of the year. According to the Harvard professor Niall Ferguson, the economists charged with navigating the credit crisis are ill-qualified to analyse the current situation – since they lack the overview of historians such as himself.

"The idea that countries don't go bust is a joke," the author of The Ascent of Money told an audience at the Guardian Hay festival. "The argument that it can't happen in major western economies is nonsense." The economic crisis, Ferguson said, would be the harbinger of a period of instability and a "series of political crises". "Forget the axis of evil," he added, "welcome to the axis of upheaval."

The drip feed of revelations about the peccadilloes of MPs is only the beginning of "a crisis of political legitimacy that will be played out over the next 18 months," he continued. "It won't be like the 1930s – it won't end up with fascism – but it might be like the 1870s, or 1970s, so don't throw out that old kipper tie yet."

There would be a rise of populist politics, which would involve "a rejection of the culture of Westminster" he said. "There will be more riots in major cities this year. If you don't trust legislation, you take to the streets."

Ferguson warned that "the debt trap may be about to spring" for countries that have created large stimulus packages in order to encourage their economies. The prime candidate to go bust, he said, "is Ireland, followed by Italy and Belgium, and the UK is not too far behind".

He also attacked economists' claims to understand the crisis. "There are economic professors in American universities who think they are the masters of the universe – but they didn't have any historical knowledge. I have never believed that markets are self-correcting. No historian could."

For the historian, Ferguson suggested, the questions about the future of the economy frame themselves between two contrasting scenarios. The first scenario is that the US authorities are right to predict growth of 3% in 2010 rising to 4% and 4.6% in the following years. He called that the "Dr Pangloss scenario".

Alternatively, he said, there is a "Dr Doom scenario", in which we are plunged into another Great Depression – in which the economy contracts by as much as 13%.

Mercifully, he argued, the Great Depression scenario is unlikely – because the Federal Reserve has "massively expanded the monetary base, which is the opposite of what happened in the 1930s". Its chairman, Ben Bernanke, had taken this step "with speed and understanding" because in his academic career he had worked on the history of the Great Depression and knew how to prevent its recurrence.

The problem now, he argued, was not whether we would enter a second Great Depression, but what would happen when current monetary policy collides with a policy of "vast government borrowing". That borrowing, he said, is on a scale unknown since the 1940s. "We have the fiscal policy of a world war without a war."

While some economists – he named Nobel laureate Paul Krugman – remain confident about the collision of these two policies, Ferguson is not so sure. "History is a better guide than Economics 101 or economic theory," he said.

He talked of a clash of the titans between inflation and deflation – or Godzilla v King Kong, as he characterised them. "I don't know who is going to win but we know that while the struggle goes on, ordinary people will get trampled. There will be more economic volatility and ordinary people will pay."

The Glaswegian academic also noted that "the Scots have played a less than glorious role in financial history". Aside from the prime minister and former chancellor Gordon Brown, he also adumbrated the role of the "excessively leveraged" Bank of Scotland and John Law, the 18th-century economist who caused the French economy to collapse in 1719-20 as a result of the so-called Mississippi Bubble.