Deutsche Bank: The Mar-a-Lago agreement is outdated in reducing the U.S. deficit, and the 'Pennsylvania Plan' will take its place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 U.S. White House and Treasury Department are located), and parts of it are already being implemented.

The 'Pennsylvania Plan' will involve two key pillars - reducing foreign investment and having domestic capital absorb U.S. Treasuries. The plan advocates for the U.S. to reduce its dependence on foreign investors purchasing U.S. Treasuries, instead having domestic institutional investors (such as pension funds, banks, and insurance companies) take on the supply of U.S. Treasuries, thereby reducing the impact of external capital withdrawals on U.S. Treasuries.

In Saravelos's view, the biggest weakness facing the U.S. economy is not the national debt, nor the massive goods trade deficit. On the contrary, foreign investors hold far more U.S. assets than U.S. investors hold foreign assets, which means the U.S. has become heavily reliant on foreign capital. If measures are not taken to change this situation, and if more foreign investors choose to shift their capital elsewhere, it could destabilize the U.S. Treasury market. He emphasized that since Trump's announcement of the 'Liberation Day' tariffs on April 2, foreign investors have begun to withdraw from U.S. assets, although it seems to be a gradual process. While the tariff policy has been temporarily suspended, the continuously worsening geopolitical uncertainty may continue to encourage foreign investors to bring more capital back home.

The other two auxiliary factors include a weakening dollar and a loosening Federal Reserve policy. The Federal Reserve faces increasing political pressure to cut interest rates, which could 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 directions of the White House and Treasury Department, aimed at lowering short-term rates, reducing government borrowing costs, and creating a favorable funding environment for demand for U.S. Treasuries. Additionally, promoting the exemption of Treasury leverage may enhance banks' ability to absorb more government bonds.

The U.S. government's advocacy for stablecoins may help implement the 'Pennsylvania Plan,' as stablecoins are typically backed by short-term U.S. Treasuries. If their circulation expands in the future, they will become a new source of demand for U.S. Treasuries. The capital behind stablecoins can be seen as replacing part of the foreign capital role, establishing a more stable internal buying presence.