Notional derivatives totals exaggerate economic 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. If the dense web of interconnected derivatives contracts represented by that exposure figure were to unravel, as began to happen in the 1998 crisis surrounding the hedge fund Long-Term Capital Management, the global financial system could experience extensive paralysis. — Donald MacKenzie, An Engine, Not a Camera, 32

Categorization

• DEFINE: Clarifies that notional outstanding derivatives figures must be deflated ~100x to estimate real market value — a key methodological caveat for reading any derivatives total.
• XREF: Directly relevant to how financialization measures are constructed; connects to Lin & Tomaskovic-Dewey on using financial income as inequality driver where measurement matters. — connects to: Nominal derivatives totals overstate their significance by roughly a hundredfold — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 32; 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

Broader Connections

• Nominal derivatives totals overstate their significance by roughly a hundredfold #corroborates (1.00) — Donald MacKenzie, An Engine, Not a Camera, 32
• 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 #expands (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1380