The example of burgers is introduced here to simplify an easy, yet widely unobserved phenomenon of interest rates and why high interest rates not necessarily means higher returns.
So, it is a common belief that the more the interest rate the higher the returns, retirees are the primary complainers when the interest rates goes low. However, it is not the case that Nominal interest rates (money interest rates) are parallel to real interest rates (interest rates adjusted with Inflation)
Not satisfied with the explanation?
Burgeronomics to the rescue.
Say an investor has 1,00,000$ to invest with inflation and interest rates of 10% and the price of the Burger is 5$. After one year he gets 10,000$ as an interest and the price of the Burger gets 5.5$. So, with that interest rates he could buy 1818 Burgers.
Here comes the second scenario. With the same amount of money 1,00,000$, lowering the inflation to 6% and interest rates at 8%. He has 8000$ to buy a Burger at the rate of 5.3$. So, you can buy 1509 burgers with the lowered interest rates.
Confused?
You were buying 1818 burgers with 10% interest amount and 1509 with 8%. So how are lower interest rates better?
Your actual purchasing power is not reflected by the interest rates, but by the principal amount plus the interest rates.
Let us count again.
With 1,10,000$ at a price of 5.5$ a burger you have 20,000 burgers on your table.
With 1,08,000$ at a price of 5.3$ a burger you have 20,337 burgers on your table.
Learning outcome: Interest amount alone is an armour, but if prinicipal and interest works together you have an armour with a sword.
P.S- I hope it looks like a 5$ plus Burger.
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