Nominal derivatives totals overstate their significance by roughly a hundredfold

Evidence

ByJune 2004, derivatives contracts totaling 273 trillion (roughly 43,000 for every human being on earth) were outstanding worldwide.’ The overall sum of such contracts exaggerates the economic significance of derivatives (for example, it is common for a derivatives contract to be entered into to “cancel out” an earlier contract, but both will appear in the overall figure), and the total must be deflated by a factor of about 100 to reach a realistic estimate of the aggregate market value of derivatives. Even after this correction, derivatives remain a major economic activity. The Bank for International Settlements estimated the total gross credit exposure8 in respect to derivatives of the sixty or so largest participants in the over-the-counter (direct, institution-to-institution) market at the end of June 2004 as $1.48 trillion, roughly equivalent to the annual output of the French economy. — Donald MacKenzie, An Engine, Not a Camera, 32

Categorization

• DEFINE: Establishes the distinction between notional derivatives totals and real economic exposure — a key deflating correction.
• SHARE: For someone working in finance or regulation: the factor-of-100 deflation of notional OTC derivatives totals is a go-to statistic.
• XREF: connects to: Financial crisis instruments circulated far above the value of their underlying assets — Max Haiven, Cultures of Financialization, 64; Derivatives notional amounts vastly exceed their underlying market values — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1380; Notional swap values massively overstate their economic importance. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1603 (+2 more)

Broader Connections

• Notional swap values massively overstate their economic importance. #corroborates (0.95) — Donald MacKenzie, An Engine, Not a Camera, 1603
• Derivatives notional amounts vastly exceed their underlying market values #corroborates (0.90) — Donald MacKenzie, An Engine, Not a Camera, 1380