Against a backdrop of already rising inflation, the Middle East descends into chaos, sending the oil price surging and tipping the global economy into recession.

Back in 1973-74, this is precisely what happened as a result of the Arab-Israeli war, through a boycott of the West by producers in the Organization of the Petroleum Exporting Countries (OPEC) cartel and a fourfold rise in the cost of crude oil.

The crisis, though, had deeper roots: the inability of the United States to anchor the international financial system, given the cost of the Vietnam war and Lyndon Johnson’s great society programs, a steady increase in price pressures over the previous half-decade and the easy availability of credit as politicians tried to keep the post-war boom going.

Not that difficult to read across from 1973-74 to 2010-11, is it? In the period since 2007, we have experienced an international financial crisis that is, arguably, even more profound than the break-up of the Bretton Woods system in 1971. The U.S. has been left severely impaired by the overstretching of its military and the bursting of its housing bubble.

Now the dominoes are toppling across North Africa. The equally undemocratic regimes in the Middle East, sitting on a large chunk of global oil reserves, look on anxiously.

Should history repeat itself, the initial result will be higher inflation as companies mark up prices and workers seek higher wages. This will be followed by deflation caused by a squeeze on corporate profitability and consumers’ real incomes from dearer food and energy, coupled with a tightening of monetary policy as central banks seek to bring inflation down.

This view of the world, however, is based on a series of assumptions, some more plausible than others. The first is that there will be a peaceful transition to democracy in Egypt. The second is that there will be no ripple effect across the oil-producing states of the Middle East. The third is that, even if the protests do spread to, say, Saudi Arabia, oil flows would be relatively unaffected.

The fourth is that the global recovery is now robust enough to shrug off any local difficulties thrown up by events in North Africa and the Middle East. And, finally, that rising commodity prices are a sign of a recovery that is starting to put down roots.

Parts of this ring true. Egypt in 2011 with Hosni Mubarak on his way out looks very different to Egypt in October 1973, with the Israeli army crossing the Suez Canal. There is no reason why a new government should adopt an anti-Western stance and the transition to democracy across the region would add to geopolitical stability.

But for oil supplies to be seriously affected, the unrest would have to spread and lead to regimes willing to use their crude stocks for political purposes. There has been a spike in oil prices, but for the moment that is all it is. There is no obvious reason why events in Egypt should result in the cost of crude approaching the record levels of almost $150 a barrel in 2008.

But what’s “obvious” does not always matter that much in financial markets, where prices are influenced by waves of overconfidence interspersed with bouts of panic. At the moment the mood is one of optimism, marked not just by a willingness to shrug off events in Egypt, but also to downplay evidence of overheating in Asia and the commodity speculation encouraged by the Federal Reserve’s cheap money policy. Ironically, this will lead to even higher oil prices and even dearer food, increasing the chances of an eventual hard landing.

So where does this leave policy? Those pressing for monetary tightening argue that the lesson from 1973-74 is that once inflation becomes embedded, it is awfully difficult to remove.

Policy has been too loose for too long, they say. Doing nothing runs the risk of even more air being pumped into asset bubbles, which will eventually burst, leading to recession.

Those arguing for policy to be left unchanged or loosened say that unions are much less powerful than in 1973 and cannot bid up the price of their labor in response to higher commodity prices. The rising cost of oil and food act in effect as a tax on consumers, they would argue, leading to deflationary pressure and eventually lower inflation. Tightening policy would simply turn a slowdown into recession.

In truth it is hard to see how this ends well. Oil’s high price reflects what is going on in China and the US rather than Egypt and Tunisia, but we should still be concerned.