How did the bankrupt and corrupt Soviet system survive for so long? One popular explanation is that the Soviet governing edifice, though crumbling, served the interests of a bureaucratic elite. What reminds me of this today is the latest note written by storied investor Jeremy Grantham. Following on from his warning a year ago, he now predicts the impending bursting of the “US bubble extravaganza in housing, equities, bonds and commodities”. I have no idea if he is right about the current state of the global capital markets. But what I find intriguing is his take on the instabilities and inequities created by contemporary American capitalism via the monetary system administered by the US Federal Reserve. “The US has seen three great asset bubbles in 25 years, far more than normal,” he wrote. “Why on Earth would the Fed not only have allowed these events but should have actually encouraged and facilitated them[?]” he wrote. A fourth one, which he describes as a super-bubble, is about to burst in the US. Whenever the economy tanks or a bubble bursts, everyone hurts. But then, the US Fed comes to the rescue with massive liquidity, inflating the assets of the 1 per cent while the rest are still hurting, especially the poor. Every liquidity bailout creates unimaginable wealth for a tiny minority at the expense of the rest. US didn’t ‘engage’ China to make it rich and free; it profited off it Why defend a system with such known fatal flaws? Would engineers use the same design if it keeps crashing? It’s an old criticism of the Fed since Alan Greenspan: no intervention when bubbles form, but massive intervention when they burst. The extreme inequality that results is not an accidental by-product, but a deliberate feature of the system. Grantham wrote: “We can measure the rapid increase in inequality since 1997, which has left the US as the least equal of all rich countries and … with the lowest level of economic mobility. “Looking back in a decade or two, if bad things have happened to our democracy, the huge surge in income and wealth inequality of the last 50 years [as CEO income moved from about 25x the average worker’s to about 250x] will have carried the largest share of the blame.” What makes the US system tick? It’s the same as the Soviets: it benefits a powerful elite. Out of fear for their survival, Chinese communists have long studied the Soviet demise. Instead of indulging in triumphalism, America’s ruling elites should do the same.