The state of the U.S. economy will determine (a) the outcome of next year’s midterm elections on November 3, 2026, and (b) President Trump’s ability to govern effectively during the rest of his mandate.

Republicans now have a thin majority of 218 seats (with two vacancies currently being filled) in the House of Representatives and 53 seats (out of 100) in the Senate.

Next year all 435 seats in the House of Representatives and 33 seats in the Senate will be contested for the 120th United States Congress.

Trump, therefore, must work fast to stabilize an overheated and unbalanced economy inherited from Biden administration. He is facing large budget and trade deficits, soaring public debt, high and unstable inflation, and a dollar losing ground as a global reserve asset.

With an average annual growth of 3.6% over the last four years, the U.S. economy ran way above its noninflationary potential of less than 2% set by productivity and labor supply.

Raise the limits to noninflationary growth

As a result of that, the core consumer price inflation (CPI less food and energy) now seems stuck at 3.3%. And a 4.3% service sector inflation is a warning that price stability – defined as an inflation rate of 2% -- will remain a serious obstacle to economic growth.

A policy mix of runaway budget deficits -- accommodated by plentiful credit flows -- must now stop to tame excess demand and balance product and labor markets. A widely expected monetary easing in the months ahead will only be possible under conditions of a large and sustained fiscal restraint.

The message is clear: Fiscal and trade deficits must be cut to bring inflation down and make possible a supportive monetary policy to ride out the cyclical adjustment without too much damage to jobs and incomes.

That’s a tall order. With a budget deficit of 8% of GDP left by Biden administration, squaring public sector accounts is a Herculean task.

Bringing foreign trade deficits down should be much easier and faster -- if sound and fury leaves space for diplomacy with China, the E.U., Mexico and Canada. That should increase American exports, avoid inflation-boosting import tariffs and slow down America’s sharply deteriorating foreign debt.

All that, however, is mostly part of cyclical demand management. A much harder task will be rebuilding structural foundations for America First and MAGA (Make America Great Again) agenda. That requires large and sustained investments in healthcare, education, science and technology to increase the stock and quality of America’s human and physical capital.

That’s what it will take to increase America’s noninflationary growth potential to the earlier 3.0% to 3.5% range to deliver on the promised “golden age” and the “shining city upon a hill.”

Don’t weaponize Europe

And that is also what will be necessary to open and sustain a constructive peace and cooperation dialogue with Russia and China, undisputed leaders of BRICS and Global South.

To do that, Washington has to quickly put an end to the Biden administration’s reckless proxy war in Ukraine with a superpower whose largest nuclear triad is ready to strike.

And then the “forever war” in the Middle East must be frozen with the help of Russia and China. Working together, along with the Arab world, they can revive and initiate the U.N. process toward Palestinian statehood and a sustainable peace.

Weaponizing Europe is a tragic mistake. That is just a continuation of the “forever war” policies that would make impossible peaceful and productive relations with Russia and China.

It’s a story of “Chekhov’s gun” from the “Theatre and the art”: "If in the first act you have hung a pistol on the wall, then in the following one it should be fired. Otherwise, don't put it there."

So, let Europe – an area that twice put the world on fire in the last century -- be a prosperous trading bloc to keep “European brothers” from each other’s throats. Ignore their harangues and don’t allow a separate European NATO wing. Remember the Roman Empire rule: “De minimis non curat praetor.”

A major adjustment to foreign policy is needed because the U.S. cannot fight Russia and China without destroying the humanity. And conventional arm skirmishes among nuclear-armed adversaries would inevitably lead to the nuclear holocaust.

There is no alternative to America’s peaceful coexistence with Russia and China. Only those three nuclear superpowers can guarantee a world order based on the U.N. charter.

Trump’s idea of an apparently broached deal with Russia to cut in half their respective defense budgets would be a smart move and good economics. That agreement could also lead China to play along and provide an overture to denuclearization.

The economic payoff of a cooperative political and trade action undertaken by the U.S., Russia and China would be enormous. That would usher in a strongly growing world economy, where the dollar would remain a key global transactions currency and an unrivaled store of value.

And that would also increase the odds for the Republicans’ hold on legislative power in next year’s midterm elections.