Well, we are now past using trillions to measure the financial markets. According to the latest Quarterly Report from the Bank for International Settlements, dated this month, March 2007:

Trading on the international derivatives exchanges slowed in the fourth quarter of 2006. Combined turnover of interest rate, currency and stock index derivatives fell by 7% to $431 trillion between October and December 2006.

(see page 24)

So, derivatives trading is now $1,200 trillion in a year. I suggest that we insist all public discussion use this “thousands of trillions of dollars,” rather than a “quadrillion” preceded by the more benign “1.2”. We must force people to start comparing what is happening in the financial markets, with what they know and experience in real world economics, where U.S. Gross Domestic Product has been left in the dust at a mere $13 trillion, and the entire world has yet to crack $50 trillion in GDP.

It is not easy to get your mind to grasp what an astonishing figure this $1,200 trillion is. If you took just one percent of it, $12.0 trillion, and divided that by the 270 million Americans not in the top ten percent of income, every man, women and child would get over $44,000. Imagine how different the economy would look if every person in the United States had been given an additional $44,000 in income every year over the past few years, instead of this:

The New York Times (Bob Herbert) reported yesterday that the 93 million non-farm production and nonsupervisory workers in the U.S. saw their real earnings go up by $15.4 billion between 2000 and 2006. That's half of the Wall Street bonuses paid by just five firms in 2006.

Personally, I think that $44,000 figure is rather interesting. Because, if the percentage change in wages from 1959 to 1981, when Reagan became President, had held at 5.478% for the past 26 years, average weekly earnings for private industry today would come to $53,802 in annual wages, rather than the $29,473 we now have. Not an exact correlation, but very, very interesting. (These are my own calculations, based on Table B-47. Hours and earnings in private nonagricultural industries, 1959-2006 in the 2007 and 2004 Economic Reports of the President.)

Or how about this: There are 45 million kids in the U.S. aged 5 to 15. With one percent of the annual turnover in derivatives, we could build and staff a brand new elementary school for every hundred kids in the U.S.

Go ahead, indulge yourself in some flights of fancy. What would you spend $12 trillion on? Would you pay off the national debt? Would you end forever any concern about Social Security? Would provide free medical coverage to every American cistizen?

Of course, it’s all just wishful thinking. Because, afterall, for whose benefit were these derivatives created? Over on DailyKos, Buhdydharma has a diary on the recommended list, The Illusion is Shattered...the centre cannot hold....Impeach, in which he or she claims that the serious people in the world are finally realizing what a complete disaster conservative ideology is, as evidenced by the ongoing disaster that is the Bush administration.

I have to dissent. Conservative ideology is serving the players in the derivatives markets very well, indeed. Their whole game is predicated on usurping the Constitutional power of the national government to regulate the value of money, as explicitly stated in Article I, Section 8. The oft-stated reason for the existence of derivatives is that they lessen risk by “laying it off.” But what risk would there if the government exercised its Constitutional power to regulate the value of money? Only by implementing the theories of conservativism -- that it is better for the “free market” to determine the value of money -- is there are a $1,200 trillion market place for derivatives created. Do you really think the people who are enriching themselves beyond any mortal comprehension by siphoning off a mere one tenth or one fifth of one percent of derivatives turnover are about to turn their back on conservativism? To them, it matters not a bit that Bush is revealed as a complete idiot, and that a few Americans see through the tragedy to the truth that it is an entire ideology that has led us into this disaster. Ten times more, twenty times more, Americans will simply throw up their hands in disgust and say to themselves, “That’s politics. What else can you expect?” Who knows about derivatives? Who even understands them? How many people know that the financial market for derivatives is nearly 100 times larger than U.S. GDP? It is sobering, and not a little frightening, that after four years of the Bush clown show, more people vote in American Idol than in the presidential election.

In fact, the people who run the derivatives markets believe there are nowhere near enough derivatives yet.

DECONSTRUCTING TODAY'S ONGOING REVOLUTION IN FINANCE - Why the Economy Needs Vastly More Derivatives, Not Less, by Woody Brock ...the enterprise of creating hedging instruments is still in its infancy, and will indeed continue to grow. The value of outstanding contracts will continue to mushroom. And yes, there is a theoretically optimal value of contracts that ideally "should" exist: Incredibly, it is a number millions of times larger than today's value...

This derivatives financier asks, in QUESTION 3: “does today's revolution in finance constitute a net gain for society?” Go and read the report. Note that he never really gives an answer.

At another point, Brock writes

that the ultimate role of securities markets is to permit an optimal reallocation of risk throughout society.

Well, call me old-fashioned if you will, but I used to think that the purpose of the securities markets was to raise the funds needed to invest in productive economic activity. But, I keep forgetting: we’re a post-industrial society. We don’t need productive economic activity anymore. No, we need, according to the geniuses that are running the U.S. financial markets, millions times more than the $1,200 trillion in derivatives we already have.

What is going on is a profound transformation that stemmed partly from the advent of Arrow's Economics of Uncertainty in the early 1950s, and partly from technological change. This revolution is impacting everything from people's ability to hedge and/or to speculate, to the meaning of "public" versus "private" ownership of a firm, to a redefinition of a "stock" versus a "bond" (already an archaic distinction), to the creation of wholly new kinds of investment vehicles, etc.

More generally, these developments are enabling a reassembling of the entire economy, a phenomenon in which the rise of private equity firms is playing a salient role. Just consider the fact that nearly $150 billion of equity was "retired" from New York and London stock exchanges during 2006--a year that also witnessed some $500 billion of private equity deals in total. In the limit, will we observe bedrock firms like IBM being "owned" by an ever-fluctuating assemblage of private equity partnerships sequentially reselling their ownership shares of the company to one another, or to other outside groups?