Deutsche Bank: The Mar-a-Lago agreement is outdated in reducing the U.S. deficit, and the 'Pennsylvania Plan' will take its place

Deutsche Bank strategist George Saravelos has designed a new framework called the 'Pennsylvania Plan' (the region where the White House and Treasury are located), and some parts of it are already in practice.

The 'Pennsylvania Plan' will involve two key pillars—decreasing foreign investment and having domestic capital absorb U.S. Treasury bonds. The plan advocates for the U.S. to reduce its reliance on foreign investors for purchasing Treasury bonds, instead having domestic institutional investors (such as pension funds, banks, and insurance companies) take on the supply of Treasury bonds, thus minimizing the impact of external capital flight on U.S. Treasuries.

In Saravelos's view, the biggest weakness facing the U.S. economy is not the national debt and not the massive trade deficit. Rather, foreign investors hold far more U.S. assets than U.S. investors hold foreign assets, meaning the U.S. has become heavily reliant on foreign funds. If measures are not taken to change this situation, and if more foreign investors choose to move their funds elsewhere, it could undermine the stability of the U.S. Treasury market. He emphasized that since Trump announced the 'Liberation Day' tariffs on April 2, foreign investors have begun to withdraw from U.S. assets, although this appears to be a gradual process at the moment. While tariff policies have been temporarily suspended, the continuously worsening geopolitical uncertainties may continue to encourage foreign investors to bring more capital back home.

Two additional supporting factors include a weakening dollar and the Federal Reserve's easing policies. The Federal Reserve is facing increasing political pressure to lower interest rates, which may help ensure borrowing costs (at least short-term rates) remain low. Senior officials within the Federal Reserve have already hinted at a possible rate cut in July, in line with the policy direction of the White House and Treasury, aimed at lowering short-term rates, reducing government borrowing costs, and creating a favorable funding environment for Treasury demand. Additionally, pushing for the exemption of bank leverage on Treasury bonds may enhance banks' capacity to absorb more government bonds.

The U.S. government's advocacy for stablecoins may assist in implementing the 'Pennsylvania Plan,' as stablecoins are typically backed by short-term Treasury bonds. If their circulation expands in the future, they will become a new source of demand for Treasury bonds. The funds behind stablecoins can be seen as a substitute for some of the roles of foreign capital, establishing a more stable internal buying power.