Via Ezra Klein, we see this graph, from Adam S. Posen and Mark Hinterschweiger at the Peterson Institute for International Economics, which shows the growth of fake money in relation to the growth of real money.
Posen and Hinterschweiger’s dry, academic take:
Between 2003 and 2008, US gross fixed capital increased by about 25 percent, a reasonable number during an economic expansion, but hardly a boom. During the same five-year period, the global amount of over-the-counter (OTC) derivatives increased by 300 percent, while derivatives held by the 25 largest US commercial banks rose by 170 percent. Clearly, growth in new financial products has outpaced fixed capital formation both globally and in the United States by a large margin. This has been especially true since 2006, when investment stagnated, but derivatives continued to grow at a rapid rate. There only seems to be a weak link, if any, between the growth of the newest complex—and now proven dangerous if not toxic—financial products and real corporate investment.
Meanwhile, note that 89 percent of these derivatives were held by the financial services industry, which should further demolish the notion that the much vaunted “financial innovation” really did anything to streamline capital — as you might expect innovation to do — but did help inflate the size of the financial sector.
As a side note, I’ll add that when this lost “wealth” is put in context correctly (that is, it wasn’t “lost” nor “wealth” per se), it illustrates just how ethereal the whole machine was. You should think about this when you hear Tim Geithner or Barack Obama say they want to return the banking industry to its precrash position.