MW A new plan might be taking shape in Washington to help manage explosive U.S. debt

By Joseph Adinolfi

A Deutsche Bank strategist introduces the 'Pennsylvania plan'

Forget the Mar-a-Lago Accord, the buzzy proposal for how the U.S. might be able to tame its increasingly unwieldy debt while boosting domestic manufacturing in the process.

See: Wall Street can't stop talking about the 'Mar-a-Lago Accord.' Here's how the currency deal would work.

George Saravelos, a strategist at Deutsche Bank, has devised a new framework for how the U.S. could better manage its debt without actually doing much to reduce it. He calls it the "Pennsylvania Plan," after Pennsylvania Avenue in Washington. Elements of the proposal appeared to have already been implemented, he said.

Saravelos's proposal wouldn't do much to alleviate the national debt. In fact, it would most likely push yields on long-dated Treasurys higher. But it could buy the U.S. more time to fix the problem, which is critical considering that the appetite in Washington for raising income taxes on individuals and businesses remains quite limited, according to Saravelos.

The national debt has topped $36 trillion, according to data posted online by the Treasury Department.

Already, the strategist has seen signs that the Trump administration is gravitating toward making some elements of this plan a reality.

President Donald Trump's budget bill, known as the "One Big Beautiful Bill Act," is likely to soon be voted into law. Several senior Federal Reserve officials, including governors Christopher Waller and Michelle Bowman, have started to push for a rate cut in July. On Wednesday, the Fed's board of governors will meet to discuss revising the Fed's supplementary leverage ratio standards.

The change is being championed by senior members of the Trump administration, and, if enacted, would make it less costly for big banks to hold more Treasury debt on their books.

"While all of these events may appear unrelated at first, we believe they are foreshadowing a potential major change in the U.S. macroeconomic policy mix in coming years," Saravelos said in a report shared with MarketWatch on Tuesday.

Saravelos's plan involves two key pillars, and ideally it would be coordinated by the Treasury Department, which, like the White House, is located on Pennsylvania Avenue.

The broad strokes involve reducing the reliance on foreign investors to absorb much of the supply of newly issued U.S. debt, while adopting policies that encourage U.S. pension funds and other domestic investors to step in and buy more.

While reducing the deficit by either raising taxes or cutting spending would certainly help address the debt, Saravelos said there is simply no appetite in Washington to tackle the debt head on.

The version of Trump's budget plan passed by the House in May would increase deficits over the next 10 years, according to an analysis by the Congressional Budget Office, although some Trump administration officials have argued that revenue from tariffs could help to offset that.

The administration's advocacy for stablecoins - cryptocurrencies typically pegged to the dollar, usually at $1 per coin - could help the administration put Saravelos's plan into action, since stablecoins are often backed by Treasury bills and other ultra-safe assets. Their growing use could boost demand for U.S. debt.

Also, the push for exempting Treasurys from banking leverage ratios could increase banks' capacity to absorb more government bonds.

In Saravelos's view, the biggest vulnerability facing the U.S. economy isn't the national debt, or the yawning trade deficit in goods. Instead, the fact that foreign investors own far more U.S. assets than U.S. investors own of foreign assets means the U.S. has become dangerously dependent on foreign money.

If nothing is done to change this, it could potentially destabilize the Treasury market if more foreign investors choose to move their money elsewhere, Saravelos said. Deutsche Bank has highlighted signs that foreign investors have started to pull their money from U.S. assets since Trump unveiled his "liberation day" tariffs on April 2, although it appears to be a gradual process so far.

Still, foreign investors reducing their exposure to the U.S. dollar have been blamed for contributing to a nearly 10% drop since the start of the year in the ICE U.S. Dollar Index DXY, which tracks the value of the dollar against a basket of rivals.

Many of the "liberation day" tariffs were delayed shortly after the original announcement, but Saravelos said worsening geopolitical uncertainty will likely continue to encourage foreign investors to bring more of their capital home.

The ultimate goal of Saravelos's plan would see a larger share of U.S. debt wind up in the hands of U.S. investors.

Two other ancillary elements include a weaker U.S. dollar and easier Fed policy. Mounting political pressure on the central bank to cut rates could help ensure that borrowing costs, at least on the short end of the curve, remain low, which should help keep a lid on the dollar's strength.

Trump has repeatedly threatened to replace Fed Chairman Jerome Powell once his term expires next year.

Stephen Miran, Trump's chairman of the Council of Economic Advisers, has been widely credited with codifying the Mar-a-Lago Accord in a paper he published late last year, although others have certainly contributed as well.

Miran has said during interviews that his paper wasn't meant to advocate for a specific policy agenda.

The Mar-a-Lago Accord, as envisioned in Miran's paper, involved striking deals with U.S. trading partners to weaken the dollar, similar to currency accords of the past. It also mentioned pressuring U.S. allies to swap holdings of Treasury bonds, notes and bills for ultra-long-term debt, while potentially charging a user's fee on interest paid to foreign bondholders by the Treasury.

-Joseph Adinolfi

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June 24, 2025 17:39 ET (21:39 GMT)

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