Forget the 'Mar-a-Lago Accord', Deutsche Bank outlines 'Pennsylvania Plan' for US

Yahoo

24-06-2025

Investing.com -- Deutsche Bank's Head of FX Research George Saravelos has introduced a new concept called the "Pennsylvania Plan" to address America's twin deficit problem.
The plan aims to find new buyers for US debt as America faces what Saravelos describes as "existential macroeconomic constraints" due to large fiscal deficits combined with a large external deficit and negative net foreign asset position.
According to Saravelos, the US recently "experienced a sudden stop in capital inflow" which forced a policy reversal on trade. While tightening fiscal policy would be the clearest solution, he notes there is no political willingness to do so.
The proposed Pennsylvania Plan has two main components. First, it acknowledges the need to reduce reliance on foreign buyers of Treasuries, who currently hold record-high exposure to US sovereign duration risk. This includes promoting dollar stablecoins backed by short-dated Treasury bills to accommodate shifting demand preferences.
Second, the plan calls for increasing domestic absorption of US duration risk through financial incentives and potential financial repression. This includes regulatory carve-outs of US Treasuries from banks' supplementary leverage ratio requirements, tax advantages for owning long-dated treasuries, and possibly mandating greater Treasury buying by retirement plans.
Saravelos explains the core aim is "to engineer a historic rotation of US duration risk from external investors to the domestic sector." While this won't solve the underlying twin deficit problem, it could buy time by deploying domestic US savings.
The plan would likely put upward pressure on US term premia and increase fiscal dominance threats through heightened financial stability risks. It would also make foreign capital more sensitive to Federal Reserve policy, potentially leading to dollar weakness.
Saravelos concludes that without willingness to improve the US fiscal position, the path of least resistance is for the administration to seek greater domestic funding, resulting in "a weaker dollar, upward pressure on term premium and a persistent pressure on the Fed to stay easy."
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