Crazy economics gets a stop button

The global economy breathes a sigh of relief as it expects a return to normalcy after the US midterm results. The initial market reaction is of hope, with US stock futures rising, treasury yields dipping, and dragging the dollar down. Sweeping legislative changes are off the table for the remaining two years of Trump 2.0. This should slow down his unconventional economic agenda of creating trade barriers, throttling immigration and reckless energy adventurism. Trump has the budget to wage the war in Iran, but he will be constrained to escalate it. The US Supreme Court has struck down the provision he used to impose reciprocal tariffs. But there are other legal mechanisms to push them through. Democrat Asian Americans and African Americans voted to the senate and House of Representatives are expected to increase friction over the president's immigration agenda. The gridlock in Washington will be a gradual containment, instead of any outright reversal.

Congress will turn its attention to regulating AI with knock-on effects for global capital flows. The midterm results directly challenge the no-handbrake expansion favoured by Trump and most Tech Bros. The industry faces an immediate transition from unchecked infrastructure-building to a more sedate pace that curbs its appetite for resources and is subject to antitrust scrutiny. Trump has the veto on sweeping legislative changes to AI safety and accountability standards. A standoff over AI that slows infrastructure-building could pull down growth of the US economy and trigger a fiscal showdown.

Effects of the elections on India are mixed. Trump's external engagement could become more insistent after what is being billed as a referendum of his policies. He will need some success overseas. A trade deal with India would count among them. He also has a considerable armoury of tariffs to push for rebalancing the US trade deficit with countries like India. New Delhi should now have more negotiating room to secure an equitable arrangement with a principal trading partner.