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Are You Prepared for Cold War 2?

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Normally, I’m a very optimistic guy. I’ve always been lucky and life has been extremely good so far. My wife and I started with nothing and we became millionaires in our 30s. We worked hard and we were lucky, but I never really appreciated the environment that enabled us to prosper so much. It’s only now that I realize the last 30 years were the golden age of globalization. After the Berlin wall fell and the Soviet Union collapsed, international trade increased tremendously. China joined the WTO and became the manufacturer of the world. At the same time, computers and the internet boosted productivity across the board. A rising tide lifts all boats. People all over the world prospered from the confluence of these events. Prospering in this environment wasn’t difficult. We got a good education, worked hard, saved, and invested. All of my friends from college also did quite well so we weren’t any kind of anomaly. Oh, and we didn’t have to worry about a nuclear war.

However, the golden age of globalization is coming to an end. At least, that’s what YouTube tells me. I’ve been watching updates on the war in Ukraine and a ton of geopolitical channels showed up on my feed. Now, I’m not too optimistic about the future. Authoritarian regimes have formed an alliance and they are pushing for a new world order. Soon, the world will be divided into two – democracy on one side and authoritarianism on the other. Welcome to Cold War 2.

Ukraine is just the beginning

I didn’t know much about Ukraine when this whole thing started in February. Yes, I heard Russia annexed Crimea in 2014, but I didn’t look into the details. It just seemed so far away and it didn’t really affect us. This time is very different.

Like most people, I didn’t think Russia would really invade Ukraine. But Putin ordered the tanks to roll in and take over. Putin wants to get rid of president Zelenskyy, a democratically elected official, and install a pro-Russia puppet government. Or maybe he wants to annex Ukraine and fulfill his imperial dream. He says Ukraine should be a part of Russia, not its own country. Fortunately, the Ukrainians prepared for this fight. They modernized and improved their military tremendously since 2014 and put up stiff resistance. Putin thought the war would be over in three days, but it is dragging on much longer.

Many democratic governments around the world condemned the invasion and the atrocities that followed. The United States, Canada, EU, UK, Australia, Japan, Taiwan, and several other countries implemented sanctions against Russia. This resulted in worldwide inflation of energy and food prices.

Russia is the third-largest oil producer and the world’s largest exporter. The war and the following sanctions caused the price of energy to spike everywhere. Ukraine and Russia are also big producers of wheat, corn, cooking oil, and other agricultural products. They are fighting each other so many farmers can’t work. Agricultural products are stuck due to the fighting and sanctions.

Food prices already increased all over the world since 2020 due to Covid. The war in Ukraine exacerbates the situation and the food price index made a giant leap to hit an all-time high in March 2022. I got a sticker shock when I went shopping for the first time in 3 months. (I was in Thailand to visit my parents.) Everything is more expensive than when I left. We’re still fortunate because the US is the largest food producer and exporter in the world. Things are more expensive, but we probably won’t starve. Some countries aren’t as lucky. Many countries need to import food to feed their people. Food insecurity will be a huge problem for a lot of people this year.

In addition, a large portion of the world’s fertilizers is stuck in Russia and Belarus. As a result, fertilizer price has increased by over 40 percent since the invasion began. Farmers all over the world are cutting back on fertilizer and yield will be reduced. Lower supply equals higher grocery bills. If you’re struggling to put food on the table now, it’ll be even more difficult later this year. 2022 is shaping up to be a bad year for everybody. Thanks Putin!

China?

Unfortunately, many countries are refusing to condemn Russia for invading Ukraine. Some have a relationship with Russia, but many also don’t want to anger China. Russia and China are both authoritarian regimes and they are forming an alliance against democracy. Yeap, the Cold War is back on. Many countries depend on China to fuel their economy and they’ll have to pick a side in this conflict.

Let’s look at Thailand for example. 11 million Chinese tourists visited Thailand in 2019. They spend freely and many Thais made a good living in the tourism sector. China is also Thailand’s second-largest trading partner. It’s understandable that the Thai government is trying to be neutral and avoid criticizing Russia. No countries in the region want to get on the bad side of the 800-pound gorilla next door. Although, Thailand exports a lot of stuff to the United States too so they’ll have to take that into account. It’ll be a tough balancing act. Coincidently, Thailand also has a hybrid form of authoritarian government. (It’s complicated…) Those guys usually don’t criticize each other.

Anyway, back to China. Xi Jinping is China’s Putin. He cultivated a cult of personality and got rid of all potential opponents. Like Putin, Xi wants to cement his legacy as the savior of their countries. He dreams of reunifying China. This means invading and annexing Taiwan.

Putin showed us what a dictator can do. He doesn’t care what a war would cost the Ukrainians or the Russian people. As long as he wins, the price doesn’t matter. Xi Jinping is the same. He’ll invade Taiwan and damn the consequences. If he reunifies China, he thinks it’ll be worth it. He’ll make it into the Chinese history books as the greatest leader since Mao Zedong. Do you think he cares what the cost would be? He would still be comfortable personally. So what if ordinary people suffer? Dictators never care about that. See the news about the lockdown in Shanghai. 26 million Chinese are suffering, but Xi will stick with the zero Covid policy to save face.

Also, we can deduce that the US won’t go to war over Taiwan. Just as the US won’t go to war over Ukraine. We will send a lot of weapons and aid, but we won’t risk World War III. We’ll implement sanctions and further bifurcate the world. Say goodbye to cheap stuff. The price of goods will increase across the board and inflation will rise again.

The end of globalization

The people of the world had a great run for 30 years. I was lucky to catch the tide and became prosperous through investing. Life will become more difficult over the next few years due to geopolitical instabilities. If history is any indication, this next Cold War will last decades. Global trade will decrease and companies will have a harder time growing. We probably won’t be able to grow our wealth as quickly as over the last 30 years. I’m not too worried because we are already comfortable financially. It’ll be tough for our son, though.

Sorry for the gloom and doom today. I wanted to write about how to grow your wealth in the coming new world order. However, that’ll have to wait until next time because I’m exhausted from doing taxes this week. Also, I need to do more research. I guess defense companies will do quite well…

Do you think the golden age of globalization is over? Is there any good news for the world?

Real estate probably will continue to perform well. We still have a housing shortage and people need to live somewhere. Check out CrowdStreet if you want to generate passive income from commercial real estate. It’s way easier than being a landlord.

image credit: historica.fandom.com/wiki/Second_Cold_War

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.

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