As discussed in comments, we can define a financial bubble as a situation where financial assets are overvalued based on expected cash flows, yet investors expect other investors will be willing to pay an even higher price. There is an literature on this, which I have not looked at in a long time.
However, this question is more about the economic effects, which is normally not part of that literature. An “economic bubble” is not standard terminology, but one could imagine that it is related to the concept of “malinvestment” in Austrian economic theory, or Hyman Minsky’s business cycle theory. I will offer some comments on Minsky’s views (which date back to the 1960s). There are more modern versions of the theory, but I don’t think we need to go that far.
The first thing to note is that we can have small financial bubbles that have no measurable effect on economic activity. E.g., look up “Beanie Babies” on the internet. People gained/lost money - so it mattered to them - but there was no effect on employment, etc. There were larger bubbles - e.g., the Gold Bubble that popped around 1980, where there were more winners and losers, and a small effect on economies (gold mining boomed).
However, the more usual case is a large bubble that drives fixed investment. Hyman Minsky termed this process as the “Financial Instability Hypothesis.” There are a number of books that describe this, including Can “It” Happen Again?
Rising financial market prices make it easier for firms/households to borrow, and they use that to do fixed investments. Such investment creates jobs, and thus propels the economy. However, they reach a point where too much investment happens, and businesses/households are stuck in an unsustainable position. This is what happened in the 2008 Financial Crisis, where (among other things) there was over-investment in housing.
We can now circle back to the question.
- The quote from Dalio - too much money chasing too little goods - does not appear to fit what happened. (I think the quote needs more context.)
- The suggestion that rich people hoar their gains does not really help. In the 2008 crisis, one of the fundamental problems (there were more) was that too many people were employed building houses. When the demand for houses dropped, it was inevitable that they would lose their jobs. The crisis followed on from that weakening of the economy.