The real question is longer than the title suggests.

I was reading about Principles For Navigating Big Debt Crisis by Ray Dalio, and he mentioned that an economic bubble happens when too much money was chasing after too little goods. Effectively, it also implies that incomes should not rise faster than productivity.

However, what if rich people (or those who own overvalued assets) don't spend their "profits" and hoard them? Wouldn't that mean the real money that was circulated in the economy will still remain stagnant, people's income did not actually rise faster than productivity, and that the bubble will just result in an arbitrary growing wealth gap that wouldn't have any real consequences until the rich decides to spend/distribute them?

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    $\begingroup$ An “economic bubble” implies that there is bubble-like activity within the economy. This is not a well-defined term, unlike a financial bubble. However, one might assume that it refers to excessive fixed investment (similar to the process described by Hyman Minsky). However, the question seems to be consistent with this being a financial bubble. This matters, as one could imagine a financial bubble that has no effect on the economy, whereas a Minsky-ite bubble in fixed investment definitely has an effect on society. $\endgroup$ Commented Jun 15, 2020 at 14:32
  • $\begingroup$ I suppose what I really want to describe is a financial bubble then. This question was inspired by my observations where output seems to be declining during COVID-19, yet stocks and assets are worth nowhere as low as the decline in economic activity. $\endgroup$
    – David LE
    Commented Jun 16, 2020 at 23:11
  • $\begingroup$ They won’t decline as much, since investors expect an economic recovery later. I’ll take a stab at an answer. $\endgroup$ Commented Jun 16, 2020 at 23:29
  • $\begingroup$ "an economic bubble happens when too much money was chasing after too little goods" -- that is usually given as the informal definition/explanation of inflation rather than of an economic bubble. Ray Dalio is just a businessman who decided to start producing books and videos about economics -- he is probably not a reliable source for learning anything about economics. $\endgroup$
    – user18
    Commented Jun 17, 2020 at 3:27

2 Answers 2


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.
  • $\begingroup$ If that is the case, then based on the discussion from the question comments, wouldn't it be more helpful for the economic condition if money were directed to consumption as opposed to purchasing financial assets? To me at least, some stock buying behavior seems more like wealth hoarding than providing liquidity to companies (think all money going into big tech companies that didn't need the money). Wouldn't that be considered deflationary? $\endgroup$
    – David LE
    Commented Jun 17, 2020 at 1:07
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    $\begingroup$ Asset prices can change without money changing hands - people just raise the price. The other thing to keep in mind is that if I buy, someone else is selling. Which way is the money flowing? $\endgroup$ Commented Jun 17, 2020 at 1:32
  • $\begingroup$ @DavidLE stocks are largely fake wealth. Not totally, because they give you a share of the the right to close down a company and take its assets for yourself. But largely. $\endgroup$ Commented May 31, 2021 at 13:58

an economic bubble happens when too much money was chasing after too little goods

This is not correct statement. When too much money chases too little goods you get inflation including asset prices inflation but asset prices inflation or inflation in general does not necessarily leads to bubbles. Bubbles are often thought to be behavioral in origin, see for example Minsky's Stabilizing an Unstable Economy or Shiller’s Irrational Exuberance. For example Minsky argues that bubbles ultimately start whenever investors get excited about some new paradigm which can be some new technology or it could also be financial in nature such as shift to permanently more loose monetary policy but it is not the increase in money itself that creates bubble but rather the exuberance investors feel. There is no guarantee that just having too much money will do this. The Shiller's work has similar message.

There can also be rational bubbles where the expectation of an asset price deviates progressively from the path dictated by its economic fundamentals (see Nelson Mark's textbook international Macroeconomics and Finance) which could be caused for any number of reasons unrelated to the amount of money in circulation.

Hence already the whole premise of your question is not generally valid as bubbles are not necessarily linked to the amount of money in economy.

Furthermore, whether there is an bubble or not, just hoarding money can be harmless or detrimental to the economy but it is definitely not a positive. If rich people would just hoard money by not spending them or not reinvesting them then the money would become 'sterile' - it would be an equivalent of removing the money from the economy which would create deflationary pressure for the economy.

Arguably, during boom such deflationary pressure is more or less harmless, although even then it would be better for an economy if the money would be invested into some productive activities instead of just hoarded. If an economy is in recession creating additional deflationary pressure is just doing extra harm to the economy as due to wage stickiness it will lead to increase in real wages precisely at times when they should be cut. In addition, if there already is bubble on the market then the deflationary pressure would just make it burst not keep going (although arguably it might be better to burst bubble sooner than latter). Deflationary pressure at right times could help prevent asset bubbles but that would be only in cases where it is actually exuberance about inflation that causes the bubble and besides your question implies that the bubble already exists. It would also be unlikely that rich people would just 'hoard' money to create the optimum level of monetary contraction to prevent it so any such task should be preferably done by central bank.

To sum up, hoarding money does not make bubbles harmless and it is not positive for economy. Hoarding money itself might be in some situation harmless to the economy but in most cases it would actually be detrimental in itself. Furthermore, by creating deflationary pressure it would actually make peoples real incomes raise faster than the productivity in presence of 'sticky wages' (at least in the short run until the deflationary pressure would become part of peoples expectations).


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