I think we should first make everybody aware that the number is misleading !!

"derivatives" is a broad category of contracts, which includes the "plain vanilla interest rate swap". And I can assure you (and you can double-check in the reports of the Offices of Thrift Supervision and Comptroller of the Currency) that between 80% and 90% of the notional amount you quote is just "plain vanilla interest rate swaps".

Why so much ?

• because they are long lasting contracts (each signed remains outstanding for several years)
  
• because all banks and brokers use them extensively to manage the Asset-Liabilities of their balance sheet (ALM). And I mean very extensively, all future cash flows tend to be hedged against rate moves (the losses resulting from a motion of the rate curve are spread between all market participants, and it's a 25-years system that works very well, fully tested).
  
• to the extent that 80% of the positions in a typical trading portfolio are just plain vanilla IR swaps.

It is very easy (and desirable !!) for the notional amount of IR swaps to reach the value of all outstanding debt on Earth, because all debt is on the book of a bank, which practices ALM to spread the IR risk with colleagues. And all outstanding debt is worth something on the same order of magnitude as all existing assets, which is much bigger than world GDP (many assets amortize over much more than a year, real estate being the most typical, so accumulated wealth is much large than one year of output). Of course, this value is somewhat magnified by the marginal pricing effect, and US RE will take many, many years to recover in value precisely because of this effect.

What everybody should understand is that there is very little risk involved with plain vanilla swaps. The swings in their market value is near-linear, well understood, and there are MtM and monthly netting agreement between all major parties. One big boy's collapse will NOT trigger a domino effect through vanilla swaps (it could through credit default swaps, but that's another story).

Remember how a plain IR swap works:
Two parties swap the cash flow associated with a theoretical debt of N $ (N is the notional), whether it's a fixed rate or a variable rate (with a set calculation formula).
They never exchange the notional.
The book value at signature is adjusted to zero, it moves negative or positive only when IR change (and remains typically within a few percents of N).
The total amount of netted cash that will change hands between the two parties is also like a few percent of N, over the many years the contract will stand.

Pierre