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Picture this: The Street of Hormuz...

And ask yourself: how will the war between Israel and Iran affect the Caribbean islands?

That is a question I expect from the small islands I consult. Wars, always affect the wealth of islands.

Here are some aspects to consider:

How is the war financed?

If USA is sending weapons for the war, who is paying for the weapons? Most of the time if you don't know who is paying, YOU, are paying for it. USA has debt it cannot every pay back. That is what some global macro analysts like Ray Dalio, have said. It can pay it back, but through printing of money. More credit, more debt. So the first aspect is: probably the war will lead to more debt in the USA. And more debt ultimately means that the US Dollar is put under pressure. More debt means the purchasing power of the dollar decreases.

As most Caribbean island's currency is pegged to the US dollar, a war means your purchasing power of your currency is decreasing. The XCg, Caribbean dollar of Curacao, the EC$, the Eastern Caribbean dollar of the ECCU, the US Dollar used by Turks and Caicos...all somehow pegged to the US Dollar.

What will the effect be on the prices?

On top of it, the prices. The war is being fought and there is the Street of Hormuz. I read that a significant part of the oil of the world goes through that street.

Now imagine a war, around that street. It means more risks, more unstable trade flows. And it means oil prices can go up.

For the Caribbean this will mean, as they almost all import oil, higher oil prices. So it means higher import bills for the Caribbean. It means higher electricity prices and fuel costs.

Of course the island's governments will try to subsidize this for 3-4 months. But if the situation continues, it will mean that they will have to let the oil prices pass to consumers.

So the scenario to run with the macro economic models of the Caribbean (I got 12 of them) will be higher inflation, due to higher oil prices. I can tell you, based on previous scenarios run, that this is bad for the purchasing power of Caribbean citizens, bad for consumption, because if your purchasing power decreases, consumption goes down. And if consumption go dow the demand goes down.

Combined to maybe less traveling of USA tourists....

Imagine a scenario where USA tourists stay home, don't travel. Now you got a worst case scenario.

For a Caribbean economy the summary is this:

- Higher import costs due to higher fuel costs, due to higher oil prices

- Lower consumption, due to lower purchasing power

- Lower exports due to lower (USA) tourist arrivals, less people spending

That is it. A war impacts your Caribbean economy negatively.

So the war going on in the Middle East is not something that cannot affect you.

Let me say that a war is a most devastating on people's lives. As a macro economist I'm here to tell you what it means for your economy. How this trickles down on your economy, on your wealth.

If you are a citizen of a Caribbean economy, the USA and you want to know more about how this war affects your purchasing power, your live let me know below.

Runy Calmera

Island Wealth