Civil revolt is currently spreading across the Arab world. The unrest that began in Tunisia has now metastasized into Bahrain, Egypt and Libya. The end result of all this turmoil has yet to be determined. What is unknowable at this time is the total scope of these rebellions. The success probabilities of this quest for regime transformations from Theocracy and Autocracy into free markets are also up in the air. An important question is whether or not Saudi Arabia eventually gets into the mix. And if so, does the current struggle in Libya morph into a proxy war between Saudi Arabia (Sunni Muslims) and Iran (Shiite Muslims). Also, will the new regime in Egypt-whatever form it ends up to be--allow Iran to use the Suez Canal to parade war ships across the Mediterranean Sea and into Syria? And if so, what will Israel's reaction to such a perceived provocation be? More importantly, what type of government will eventually replace these dictators if the freedom movement is successful?

There are many unknowns; but what is knowable is the immediate impact from this turmoil on the price of oil. WTI is now trading just above $100 a barrel and Brent Crude is well above the century mark already. If the unrest does indeed spread to Saudi Arabia the price of oil would most likely surge much higher. The country produces 12 million barrels of oil per day and is the second largest producer in the world. Arab and most emerging markets have already been placed under extreme pressure from skyrocketing food costs. Rising energy prices will further exacerbate that condition and may push many economies over the edge.

To add salt in the wound of this recent rise in oil prices, the United Nations stated in early February that global food prices are now at an all time high. The USDA indicated this week that 2011 corn inventories will be the lowest since 1974. Despite the fact that farmers have boosted the output of wheat, rice and feed grain by 16% since 2000, demand has outstripped supply by 4 percentage points. Skyrocketing agricultural prices have not yet put the supply and demand metric into balance. Corn is up 95% and wheat has increased by 70% since their year ago levels. That has aided global food costs to jump by 25% YOY since January 2009.

It is evident that global consumers continue to get pummeled from rising food and energy prices. Meanwhile, in addition to coping with the evidence of rising inflation rates, the U.S. consumer is also being hurt by the continued contraction in home prices--which are their main asset. S&P/Case-Shiller indicated on Tuesday that their National Index dropped 4.1% from Q4 2009 thru Q4 2010. Home values have now dropped for 6 consecutive quarters and clearly indicate the real estate sector is suffering a double dip in price. The ramifications of all the above data are foreboding for U.S. GDP growth. Most importantly, anemic economic growth will worsen our debt to GDP ratio and will place further pressure on our already damaged U.S. balance sheet.

It is very predictable what the Fed's reaction to rising food and energy prices will be. We already know that Bernanke exculpates the Fed for any blame in creating inflation, either domestically or abroad. In fact, he strips out food and energy prices when calculating inflation and focuses only on core price metrics. Therefore, he will continue to place emphasis on falling real estate prices as more evidence of deflation. But the truth is that Bernanke doesn't know what causes inflation. As a consequence, he can't be expected to spot inflation, much less, likely to do something about it. Using the Fed's own history as a guide, Bernanke will view rising commodity prices as a threat to GDP growth and a sign of pending deflation. That's because the Fed is caught up in a Phillips curve philosophy that equates economic growth and prosperity with inflation. Bernanke also believes that slow growth and rising unemployment rates equate to deflation. Since he believes rising commodity prices are deflationary and have nothing to do with his own loose monetary policy, the Fed is likely to expand its balance sheet to a greater degree.

The fact that the Fed's massive money printing effort is the progenitor of global food riots completely escapes him. In sharp contrast to the real cause of rising commodity prices, the current crisis will be used as the impetus to construct QE III. Unfortunately, the viscous cycle of stagflation will grow more acute with each iteration of the Fed's quantitative easing effort. And countries that continue to make the mistake of pegging their currencies to the U.S. dollar will suffer more inflation and more destabilization.