DB The Pennsylvania Plan Dealing with US Twin Deficits

Global Foreign Exchange Date 24 June 2025 FX Special Report

The "Pennsylvania Plan"- Dealing with US Twin Deficits George Saravelos Introduction Strategist While all the focus of recent days has been on the Middle East conflict, developments in Washington DC are arguably of more sustained macroeconomic significance. The US budget bill is likely to soon be voted into law, a number of Fed officials are making surprising references to a July rate cut and the Fed Board meets tomorrow to discuss an easing of bank regulatory requirements. While all of these events may appear unrelated at first, we believe they are foreshadowing a potential major change in the US macroeconomic policy mix in coming years. We dub this shift the “Pennsylvania Plan”, a policy designed to help the US administration deal with America’s explosive debt. The key components of this plan are the following: a strategic re-allocation of US Treasury ownership from foreign to domestic investors, rising domestic financial repression, a major push for dollar stablecoins, growing pressure on the Fed to cut rates and a materially weaker USD.

On the perils of “Mar-A-Lago” We have argued America is approaching existential macroeconomic constraints. The problem is not the large fiscal deficits that are about to be locked into law by the US Congress. It is that these are combined with a large external deficit and a very negative net foreign asset position that makes the US reliant on foreign funding. This ultimately constrains American sovereignty. Nowhere was this more apparent than a few weeks ago: the US effectively experienced a sudden stop in capital inflow, arguably a key driver in forcing a U-turn on the Administration’s trade policy.

The clearest solution to this American twin deficit problem is for the US to tighten fiscal policy. But as the political backdrop makes clear there is no willingness to do so. The Chair of the Council of Economic Advisers Stephen Miran has published an alternative idea: the shopworn “Mar-a-Lago Accord". This resolves America’s imbalances via global debt restructuring. But we have written extensively on why this will not work: as long as America is running twin deficits, any discussion on a restructuring of the nominal value of US debt via maturity extensions or coupon taxation will only make the funding of existing deficits worse. No international creditor would be willing to participate in a restructuring without an improvement in US deficits, in our view.

Introducing the “Pennsylvania Plan” If foreign investors are not willing to participate in a debt restructuring and the US Congress is unwilling to reduce the fiscal deficit, how can America’s unsustainable

Deutsche Bank AG IMPORTANT RESEARCH DISCLOSURES AND ANALYST CERTIFICATIONS LOCATED IN APPENDIX 1. UNTIL 19th MARCH 2021 INCOMPLETE DISCLOSURE INFORMATION MAY HAVE BEEN DISPLAYED, PLEASE SEE APPENDIX 1 FOR FURTHER DETAILS.

24 June 2025 FX Special Report

external position be managed? Who will buy US debt? We propose the “Pennsylvania Plan” – a policy shift driven and co-ordinated by the US Treasury located in Washington DC’s similarly named Avenue. The policy aim is simple – find new buyers of US debt. It is broken down in to two component parts.

1. Reduce reliance on foreign buyers of Treasuries. This is arguably not a policy choice but an inevitable outcome. Foreigners currently hold record-high exposure to US sovereign duration risk. The withdrawal of America’s global geopolitical and economic leadership, persistent fiscal deficits, and growing budget deficits elsewhere are all combining to reduce foreign willingness to accumulate US debt. The solution we believe is to recognize and accommodate the shift in demand preference by shortening foreigners' duration exposure. US administration advocacy for dollar stablecoins backed by short-dated US Treasury bills should be seen in that context.

2. Increase domestic absorption of US duration risk. It is US savings that have to bear the brunt of absorbing greater Treasury issuance. The American private sector balance sheet is strong, with high cash holdings and plenty of potential to absorb sovereign credit risk. Broadly defined, policy can…