The government is printing money like there's no tomorrow and running record deficits. So why isn't inflation out of control? To answer that, we need look no further than Economics 101. When demand exceeds supply, prices rise and when supply exceeds demand, prices fall.

Up until July 2008, commodity prices were rising because institutions were able to borrow money to go long commodities and short the dollar. As a result, the demand for commodities exceeded their supply and prices rose -- contributing heavily to rapid inflation. For instance, oil rose from $24 a barrel in January 2001 to peak in July at $147 a barrel. But since then, this commodity trade has evaporated along with access to debt -- and oil now trades 70% lower at $43.

But this fall, there were some slight problems with the financial markets -- for instance, the government decided to let Lehman Brothers file for bankruptcy. This financial collapse has caused banks to clamp down on lending. And since consumers, which account for 70% of GDP growth, depend so heavily on borrowing to finance their consumption, an end to lending cuts way back on their purchasing power. So does their $10 trillion loss of housing and stock wealth in the last year. With the disappearance of debt, supply exceeds demand and prices tumble.

Oil prices got a boost today from the news of a large interest rate cut in China, which analysts believe should have the result of lifting oil demand for the country.

China is doing all it can to keep its booming economic growth alive. The country announced its largest interest rate cut in 11 years, as the People's Bank of China slashed rates by 1.08 percentage points.

Oil prices, which have been in a virtual free fall since their record high levels over the summer, moved up as high as $52.76 earlier in the session, and are now trading up $1.40 a barrel to $51.75.

The move by China should help the country rebound from the current slowdown it is seeing in economic growth. The massive expansion of the economies in China and India are a major reason why oil prices moved so much higher in the past couple years, and if today's announced cuts have the intended effect of increasing economic activity, then the country should indeed see an increase in its thirst for oil.

When the Federal Reserve cut interest rates by 50 basis points in October, the board members clearly expected to need further cuts, based on the minutes of their Oct. 28 and 29 meeting that were released yesterday. When looking at the October minutes, you can see there was much more diversity in opinions than in June, but that diversity was centered around how bad things would get. No one sees significant improvement any time soon.

The market expects a rate cut of 50 basis points when the Fed meets December 16. Given the continued gloomy picture, I'm not sure why the Fed is not already cutting rates more aggressively and possibly all the way to zero. The only problem is once they get there, they have nowhere left to go.

The Fed does project unemployment rates to reach 6.3 to 6.5 percent in 2008, which we've already reached. The Fed thinks the unemployment rate could go as high as 7.6 percent next year and then begin to drop in 2010 with an unemployment rate of 6.5 to 7.3 percent. In fact, some at the Federal Reserve board meeting think unemployment could go as high as 8 percent in 2009. Some think we'll start seeing signs of recovery by mid-2009, while other Federal Reserve board members think there will be a longer period of economic weakness.

The main question that everyone keeps asking regarding the housing market is: when are people going to start to buy again? Last week we saw a little encouragement in this area, as mortgage applications rose a bit higher, possibly in reaction to lower interest rates.

Almost everyone agrees that the troubled housing market is a key ingredient to the current economic troubles that the American economy is dealing with, but today we got a bit of good news, as mortgage applications reportedly rose by 11.9%.

Last week's move is a nice sign, but we also have to remember that just the week before, we were looking at applications running at their lowest level since all the way back in December 2000, so we can't allow ourselves to get too excited over today's news. We still have a long way to go before the country is able to crawl its way out of the current housing melt down.

More progress on the credit market front.

The initiative by major central banks to increase the supply of dollars globally to free-up credit continued to move rates in the right direction early Monday -- down -- as rates fell to their lowest level since the failure of Lehman Brothers on September 15.

The London rate for three-month loans in dollars declined for the 16th consecutive day, dropping another 17 basis points to 2.86%. The three-month rate for the euro, the Euribor, also fell 3 basis points to 4.74%. Rates also fell in Asia.

Meanwhile, the London interbank overnight rate, or LIBOR, decreased 2 basis points to 0.39%. In addition, the difference between what banks and the U.S. Treasury pay to borrow dollars for three months, the TED spread, fell to 224 basis points, which is down from 364 basis points on October 10.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

The thaw in short-term interest rates continues.

The effort by major central banks to increase the supply of dollars globally to free-up credit continued to move rates in the right direction Wednesday -- down -- as private banks were encouraged by commercial paper purchases by the U.S. Federal Reserve and a likely interest rate cut later today.

The London rate for three-month loans in dollars declined for the 13th consecutive day, dropping 5 basis points to 3.42%. The three-month rate for the euro, the Euribor, also fell 2 basis points to 4.83%, and the three-month rate for Hong Kong dollars, the Hibor, dropped 30 basis points to 3.54%.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

Enough already -- leave something in the tank for next time!

When the Federal Reserve Board meets on Wednesday they should leave interest rates where they stand. The lack of liquidity in the market place is not coming from high interest rates. It is coming from a de-leveraging of the economy.

The Federal Discount Rate currently is 1.75% and was 2.25% less than a month ago. Alan Greenspan was too quick to lower the rates before and too slow to raise them when he should have. Ben Bernanke was too slow to lower them this time around and I do not want him to be too hasty to lower them further now when he should take a breath.

We're all rooting for you, Ben (what choice do we have?), so deal with the cash sitting on the Treasury's desk now and get back to this interest rate issue next month. Let the European banks lower their rates. That will strengthen the dollar and might help to stabilize oil prices, which have been dropping rapidly. Lower oil prices will put billions of dollars back into consumer hands and the overall economy. Lower oil prices will do more good than lower interest rates.

We need stability! We need predictability! Part of the reason we got into this mess was cheap credit and poor foresight on the part of the government, investors, and lenders.

The meltdown in short-term interest rates continues unabated.

The effort by major central banks to increase the supply of dollars globally to free-up credit continued to move rates in the right direction Wednesday -- down. The London interbank overnight rate, or LIBOR, fell another 16 basis points to 1.12% -- its lowest level since June 2004. The London rate for three-month loans in dollars declined for an eighth consecutive day, dropping 29 basis points to 3.54%.

In addition, the difference between what banks and the U.S. Treasury pay to borrow dollars for three months, the TED spread, fell to 248 -- down from 434 basis points a week ago.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

It's a market and an economy that's offering few bright spots, so you take them where you can get them.

One bright spot occurred late Wednesday in the credit markets. California increased the amount of bonds/short-term notes the state had planned to sell to avoid a cash shortage, after bond demand proved to be solid, Bloomberg News reported Thursday.

California State Treasurer Bill Lockyer said he's increasing the note sale by $500 million to $4.5 billion while also lowering the yield range, or interest rate, to a maximum of 4.25%, Bloomberg News reported.

'I wish they all could be California...bonds'

California is the largest borrower in the municipal bond market and no small barometer of lending and economic activity. If ranked as a country, California would have the ninth largest economy in the world as ranked by GDP.

Economist David H. Wang told BloggingStocks Thursday the solid demand for California's bonds should be viewed as incremental progress in public officials' efforts to unfreeze credit markets.

With all the negative news that we have seen lately, it's nice to hear one piece of positive news regarding the housing market. We got that today on news that pending home sales rose unexpectedly in August.

The National Association of Realtors tracks home sales in its index, and reported today that its pending home sales index rose from 87 in July up to 93.7 in August. Going into today's report, analysts had been expecting to see the index actual fall, and were thinking that we would see the number drop down to 86 in the month, so the increase was definitely a bit of good news in an otherwise rocky market.

The areas of the country that saw the best jump in July were the same ones that have been beaten up the most over the past year, including California, Nevada, Florida, and Arizona.

As global markets plummet, the Federal Reserve pulled another arrow out of its quiver and reduced rates by 50 basis points. The short-term Fed Funds rate is now down to 1.5%. This move comes weeks ahead of the Fed's regularly scheduled meeting.

This should at least give U.S. stocks a lift today.

Other central banks in Europe, Canada, Switzerland and England also ratcheted back rates today.

A problem that originated in the New World is re-exposing some long-standing nuanced opinions in the Old World.

France and Germany disagreed over how to prevent the global credit crunch from further hurting European banks. Germany, Europe's largest economy, does not want to set up a bailout / rescue fund that France is seeking. Luxembourg Prime Minister Jean-Claude Junker said the fund, which France argued should be as large as 300 billion euros or about $415 billion, isn't needed.

Economist Richard Felson said the United Kingdom also is against the idea, with Britain arguing that an ad hoc intervention policy would be sufficient for now. "A lot will depend on how the U.S. rescue package, provide it passes the U.S. House, performs in lowering overnight interest rates and restoring confidence," Felson said. "There's the sense in the U.K. that while the crisis extends beyond America's borders, the bulk of the bad-asset fallout will still be U.S.-based."

The U.S. Senate passed a revised rescue package, 74-25, Wednesday night and the U.S. House is expected to vote on the measure as soon as Friday.

However, the measure had little impact on overnight interest rates, at least initially. The London Interbank Overnight Rate, or LIBOR, rose for a fourth day, up 6 basis points to 4.21% Wednesday night, as banks continued to hoard cash.

I have to hand it to Ben Bernanke. He really did the right thing this afternoon with interest rates. I was afraid he would cut them drastically to provide liquidity to the market and give it confidence after yesterday's 500-point decline. But I think that move would have been absolutely wrong. That's because it would have signaled Fed panic and would have provided no benefit for the real problems facing financial institutions.

Since he's cut rates from 5.25% to 2%, things have not gotten better in the credit markets. Instead, the rate cuts have had negative unintended consequences. The lower rates spurred inflation -- particularly in commodities. That's because speculators bought dollar-denominated commodities like oil and shorted the dollar to take advantage of inflationary expectations.

Unfortunately, these higher commodity prices squeezed middle class consumers whose spending makes up 70% of GDP growth. With declining incomes and higher costs, those consumers were being squeezed. That translated into slower growth and put pressure on companies to cut costs by laying people off. Needless to say, an unemployed worker has even less money to spend. This means even slower growth, more layoffs, and less consumer spending -- a vicious downward spiral..

"The latest annual rate of inflation measured from last July to this July was 5.6%, the largest annual gain since way back in January 1991," observes Alexander Green.

Here, the investment director for the industry-leading The Oxford Club suggests that investors consider the iShares Lehman TIPS Bond Fund (ASE: TIP), noting, "This is a great way to buy a diversified portfolio of inflation-adjusted Treasuries and track them quite easily."

"The latest consumer price index figures were a bit of a shock; the annual rate of inflation measured from last July to this July was 5.6%, the largest annual gain since way back in January 1991.

"Despite these horrendous inflation figures, gold, mining shares and other inflation-sensitive indicators did nothing – or even fell. What gives?

"Remember that the market is always looking forward, not back. Investors are always more concerned with what lies ahead than what happened in the recent past. Next month or next year may be a different story entirely.

"That's why every investor should have a hedge in his portfolio, like inflation-adjusted Treasuries. These bonds are unique in the investment world. They are the only investment guaranteed to beat inflation. And they are great portfolio diversifiers. They don't march in step with either stocks or bonds.

Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.

You may not follow the ongoing drama, the one about Freddie Mac (Federal Home Loan Mortgage Corp.: NYSE: FRE) and Fannie Mae (Federal National Mortgage Association: NYSE:FNM).

You probably see the headlines about problems each has, maybe wonder what the fuss is about. Since you don't own the stock or the preferred or any of the debt, you don't really spend too much time on it. You've got your own stocks with problems, or you've just got enough problems without any stocks.