Thanks—I fixed the global debt in the non-financial sector figure!
And yes, you’re right that notionals need to be interpreted carefully—I initially had a paragraph in my post that notionals should be interpreted carefully, but then I cut it out. Your example is a good one and shows that, in theory, a world with a high notional value of derivatives trading can be one with a stable financial system.
However, I disagree that it is a “totally irrelevant number” and that the in practise notional total volume might be (a not entirely very bad) proxy measure for economic stability.
“To give an idea of the size of the derivative market, The Economist has reported that as of June 2011, the over-the-counter (OTC) derivatives market amounted to approximately $700 trillion, and the size of the market traded on exchanges totaled an additional $83 trillion. For the fourth quarter 2017 the European Securities Market Authority estimated the size of European derivatives market at a size of €660 trillion with 74 million outstanding contracts.
However, these are “notional” values, and some economists say that these aggregated values greatly exaggerate the market value and the true credit risk faced by the parties involved. For example, in 2010, while the aggregate of OTC derivatives exceeded $600 trillion, the value of the market was estimated to be much lower, at $21 trillion. The credit-risk equivalent of the derivative contracts was estimated at $3.3 trillion.
Still, even these scaled-down figures represent huge amounts of money. For perspective, the budget for total expenditure of the United States government during 2012 was $3.5 trillion, and the total current value of the U.S. stock market is an estimated $23 trillion. Meanwhile, the world annual Gross Domestic Product is about $65 trillion.
At least for one type of derivative, Credit Default Swaps (CDS), for which the inherent risk is considered high[by whom?], the higher, nominal value remains relevant. It was this type of derivative that investment magnate Warren Buffett referred to in his famous 2002 speech in which he warned against “financial weapons of mass destruction”. CDS notional value in early 2012 amounted to $25.5 trillion, down from $55 trillion in 2008.”