When mortgage rates fluctuate, it has an impact on other aspects of the monetary system and economy not directly related to the housing market or mortgage industry. How changes in rates play a role in our spending power is of critical importance.

According to basic economic theory, consumers spend more when it's easier to borrow, and cut back on buying when rates and prices rise. Also, the direction of mortgage rates influences the buying ability of consumers. Knowing how and why can help you to predict the economic outlook for your own individual budgets-even if it looks treacherous.

Low rates, more shopping

Lower mortgage rates mean that houses are easier to pay for, and increased home buying usually stimulates the economy. First, it helps the real estate market. Furnish your home with appliances, and that boosts the manufacturing sector. Borrow against your rising home equity as housing prices go up, and you can afford to shop for all sorts of other goodies, which helps a wide variety of different businesses and contributes to a well-rounded robust economy.

If prices get too high-as they did when we experienced the recent real estate "bubble" --the Fed may raise rates in an attempt to curb inflation. As it becomes more expensive to borrow, consumers tighten their purse strings, and the pendulum swings in the other direction to offset prices.

Consumers suffering

Interest rates have now hit historical lows, and should inspire a buying frenzy. But it's not-instead real estate sales are plummeting. The reason is that mortgage lenders have lost so much money, that they have less of it to lend. Houses, now worth much less, represent less collateral and buying power. Meanwhile, the prices of gasoline and other commodities are rising, and to pay for that inflation, consumers are pinching pennies.

Then there's the issue of the national debt. The U.S. has seen the balanced budget of 10 years ago turn into a sea of unprecedented red ink, as the government spent money, but didn't reimburse the Treasury. Going to war, for instance, is always financially draining. Throughout history, nations have been compelled to raise taxes to fund wars. But the government lowered taxes during the war in Iraq, and paid for it on credit. Because of our growing debt and exceptionally low rates of return on interest-bearing instruments, countries wanting to earn healthy yields are not investing as much in the U.S. That sinks the value of the dollar, and with a weaker dollar, we have less spending power compared to other currencies. Canada used to be a vacation bargain for American tourists, for example, but recently, that situation, too, has reversed.

The good news is that foreigners are buying more of our cheap exports, which helps. But we buy so many of our goods from overseas-including gasoline-that even low rates and increased imports aren't enough to strengthen the dollar, offset our debt, and bolster our anemic buying power.