How does systemaccounting produce a scientific measure of the cost of capital?

A:

Money must measure value delivered—ownership of financial risk included, since one is not at liberty to equate value physically delivered by others in the past with value personally expected in the future.

Therefore, systemaccounting enforces a law of conservation of information to protect an economy from those who would violate it to delay the effect of false promises and spread their liability to others. With a conservation law in place, systemaccounting eliminates the possibility of equating what's been promised (hypothesis) with what's been physically earned (fact) so as to subsequently price capital strictly by referencing the cost of equity, rather than debt, as the system's risk-free rate.

Risk functions across a spectrum of predictability. The highest end of the spectrum is located at "certainty" where information is "risk-free". The opposite end of the spectrum is labeled "absurd" where information supplies zero predictability. The price of credit hovers around the high end of the spectrum because lenders prefer a more predictable return to the type that characterizes the other side. However, there is zero correlation between expecting predictable returns and their ability to be physical fulfilled—this is why the cost of credit is not a legitimate reference for a system's risk-free rate. Despite equity's increased variability of return, it is the only measure a system may appropriately reference as its risk-free rate since, for example, if a set of firms are measured to produce anywhere between 3%-159% return on equity, it was the physical fulfillment of at least 3% that is scientifically proven as the set's risk-free, or scientific rate.

Except where the most trivial math & science is concerned (1 apple + 1 apple = 2 apples), risk is subjective because prediction involves each person uniquely accessing whatever information is available to them to exercise judgement. While each human being must be free to judge risk according to their own capacity, systemaccounting only exists to publish what The Universe is certain of in the following way:

All transactions in systemaccounting possess both a differential & differentiable data structure (see Physics of Value, dO/dt):

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1. This is how a transaction appears when the owner of Ellie's Cookies opens a systemaccount in the amount of $1,000 through the U.S. Treasury (record1.PNG):

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2. This is the transaction that appears when James purchases $7 worth of cookies from Ellie's Cookies (record2.PNG):

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3. And another transaction where Ellie's Cookies purchases $40 worth of eggs from Daisy's Eggs (record3.PNG):

 record3.PNG

Each systemaccounting transaction records a change in the balance of a pair of user accounts as ownership of i) money, and ii) goods & services flow in equal but opposite directions (risk may be included, but ownership data provides for the enforcement of the law of conservation of value & liability between users).

Since James is located on the expense side in the second transaction, adding up all historical transactions referencing his user account will produce a current balance that is $7 less than it was before the purchase. Moving forward to the third transaction, the balance of Ellie's Cookies is now 1,000 + 7 - 40 = $967. As Ellie continues selling her cookies, her account name is always referenced on the revenue side. Whenever Ellie uses her business account to purchase flour, eggs, electricity, and so on, the account name is referenced on the expense side.*

Assume Ellie's Cookies earns a revenue of $10,000 for the month, and the account's expenses add up to $6,500. By computing Revenue - Expenses for Ellie's Cookies, the economy measures the business to have produced a $3,500 profit. Dividing the $3,500 profit by Ellie's equity identifies her monthly return on equity.

When the same (Revenue - Expenses)/Equity computation is conducted across all business users throughout the system, the economy is measured to have produced a 3% return on equity. With a scientific measure now in hand, no rational person would walk their money into a "bank" supplying an inferior financial instrument because the price of capital was measured by The Universe to be at least 3%. Basically, systemaccounting causes the demand for capital to be signaled by a scientifically verified rate of return, thus empowering the public to ignore whatever imaginary numbers are defined by financial clergy established by the state.

The rate paid by the U.S. federal government to borrow is currently judged by the credit market to be the "risk-free" rate because lenders predict the government's ability to deliver on its financial promises is at least equal to its ability to tax its citizens, i.e. "My promises always come true because of my right to tax." Therefore, if a government issues an inordinate amount of promises, the public must then bear the burden of fulfilling the expectations of the lenders who purchased them, even if such expectations are not shared by the public—a condition known as information asymmetry. Democracy's limitation is drawn at the line of consensus. Consensus predicts agreement; not truth. To spread the liability of not judging in favor of the truth is the price of consensus. To mitigate the risk of imbalanced access to information, and the irrational outcomes it precipitates, choices must therefore be accurately measured and published so that shareholders may have their expectations calibrated accordingly.

*Note: Systemaccounting does not support net debitors because its single purpose is to measure activity. A strict separation of concerns between "measuring" and "lending" guarantees informed & optimal lending in a system that protects the public from the externalization of i) financial risk and ii) the cost of transacting on false information.
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