A Suspicion about Bubbles & Inequality

When I’ve read about retirement planning I’ve often seen references to savings earning a return averaging 8% a year (just recently I’ve seen the 6% figure used). That’s been tougher to find lately, as “safe” investments (federally insured accounts) are paying at a rate below the rate of inflation.

If one has piles of money lying around, one wants to find a decent rate of return, so what is one to do? One looks for some market area or segment that looks (the least bit) promising and plows the money in. The result is asset bubbles as prices are artificially inflated, surpassing the inherent value.

I suspect that as income (and asset) inequality continues, there will be a procession of bubbles as investors chase good earnings. If income (and assets) were more equalized, people at the lower end of the economy would be able to engage in more consumption, helping businesses. At the same time, a greater distribution of wealth would spread the saving across the economy, rather than just at the top. The combination of greater economic activity across all quintiles would do more for the economy than does the current practice of concentrating wealth in the hands of the elite.

Caution! This is only a suspicion on my part. I have no degrees in economics to base this suspicion on. What do you think of my suspicion?

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