So, what happened is that the US market was no longer outperforming. That's unusual. Usually, people think of that as a flight to quality asset and the dollar went down. If you go back to S&P corrections going back to the year 2000, there have been 13 of them since the year 2000. That means declines of 10% or more. Some of them are much more. The one in April of last year was quite a bit more than 10%. But during the first 12 of them going back to 2000, every single time the US dollar index went up versus foreign currencies, usually by about 8 to 10% during that S&P 500 correction. This is the first time in the early second quarter of 2025, the first time going back 25 years or so, that the dollar went down as the S&P 500 fell. The dollar went down actually about 8 or 10 percent. I believe this is going to continue to be a proven thesis because it worked out all the way through really 2025. I'm just really referencing that volatility period in my remarks I just made.
The US dollar assets for dollar-based investors, my recommendations going back about 18 months and certainly I talked about this a year ago, is dollar-based investors should be investing in foreign markets in foreign currencies because the dollar appears to me to have to be in a long-term bear market. It has a lot to do with global tensions. It has a lot to do with overinvestment by foreigners in the United States having been made over the course of the past 16 or 18 years. A very major aspect that I think doesn't get nearly enough play and many investors aren't even aware of is that over the past 16 or 18 years there has been a monumental move of foreign investors investing in the US. Starting about 18 years ago, the net foreign investment position was they were net long versus our investments overseas by dollar-based investors, they were net long $3 trillion of US assets. Well, they started in earnest to add to those investments back then and they added about $25 trillion over about 15 years. So you had something like $1.5 trillion dollars come in net every single year.
It's no surprise, it's well known that the US market outperformed foreign markets almost continuously over that period. Do you think maybe there might be some causality? Sure, the US economy was probably better and at times better managed, but when you have that type of net inflow, that's net buying. And so of course the US market had tremendous outperformance. But now the imbalance is so great with $28 trillion of foreign net investment in the United States and there's reason to believe that that trend is certainly slowing but probably even reversing. So what will happen as we move forward? Well, that means that some of that net foreign investment is likely to go out and be repatriated into their own countries. And you don't need $1.5 trillion per year to have an impact. If they just pulled out over a three-year period, I don't know, $3 trillion over a 10-year period, $8 trillion or something, that is very likely to cause a reversal in the stock market in the US outperformance.
That has certainly happened last year. A lot of smiling faces with the S&P 500 up nearly 20%, the NASDAQ up even more. These are nice gains. But if you're a dollar-based investor and you invested in emerging market index funds, even just index funds, you had a return of something like 37%. If you're a dollar-based investor and you invested in the UK, you had very substantially higher returns. If you're a bond investor and you invested in emerging market debt as opposed to developed market debt or certainly US debt, you did much better. And then the best of all is something that I didn't really recommend a year ago, but I started doing thanks to the increased confidence of how markets were behaving during that volatility period. For the first time in my time here at DoubleLine, we started about 17 years ago and over those first 16 and a half years we didn't own any emerging market currency denominated securities. But last June we decided it was time and we started to move into local currency emerging market debt. Not in all of our strategies because it's too high volatility for some more risk-controlled strategies, but for those that are more opportunistic we added to local currency emerging markets. Not on an index fund basis. We didn't want to own certain securities, particularly we wouldn't want to own China. We want to own certain of the countries in South America but we do invest heavily in South America in the more stable countries and that has worked well.
I have a strong feeling that this is not the seventh inning of this outperformance. I think it's maybe bottom of the first and so I strongly believe in that. This thesis is the primary thesis at the center of my investments. It's always exciting in the investment business, sometimes it's kind of dull, there's not much going on. But then you start to think that maybe there's a sea change of fundamentals and if I interpret them correctly we could really see some positively differentiated performance. And the center of that thesis is dollar weakness. I know I'm not alone on this now. I was alone on that a year ago, but I'm not alone on that now because people tend to move in herds and they don't want to be wrong alone. One of the things that plagues the investment consultant industry and the investment committee industry at large asset pools is they herd together. They don't want to be trailblazers because they're more comfortable being wrong with a lot of company than being wrong alone. So I think that it's a little bit disconcerting that the dollar trade is now well established.
My yield curve steepening idea, which I was the voice of one crying in the wilderness on this about a year ago, is that the long end of the bond market is not going to rally unless it becomes manipulated. There's a couple of ways in which the long end of the Treasury bond market can be manipulated. And when I say these things, a lot of people push back on me because it flies against their experience. But one thing they could do is if the long rates go up too much, and what does too much mean? I would say the long bond is at about 4.85 today. I think if it heads towards 6% they will start to get really worried and get really worried about this little thing called interest expense which isn't a little thing anymore. The national debt is very big. We all know that. But the interest rates were so low for so long that you didn't really see it. It was disguised by the fact that the average Treasury rate was at around 1.8%.
With rates that low, just look at what Europe did. They put it at zero. If your interest rates are at zero, you can borrow infinity and you don't have an interest expense. You're going to have some trouble down the road when you have to pay the principal back, but maybe you just refinance that at zero again.
So, if the rate goes up too much, I believe there will be action taken. And I don't think this is all that radical of an idea because government officials have talked about this. Scott Bessent himself before he was sworn in as Treasury Secretary talked about this as well, that maybe you do yield curve control which they tried in Japan. A lot of people think that we would never do yield curve control. It means fixing interest rates basically. The Fed can fix interest rates obviously at the short end. The market may revolt if they run too much of an inflationary policy, but they can also suppress long-term interest rates through a purchase program. The United States did that. If you think the US won't do that, they did that. They did that after World War II. The debt was so high and people were worried about inflation and the government was worried about interest expense problems. And so although economists broadly forecast that inflation was going to go up, and in fact from 1945 until the mid-50s it went up a lot. It went up from about 2% inflation which is kind of where we started our journey pre-COVID, and it got up to like 8 or 9%. All that while until 1951 anyway they were fixing long-term interest rates at 2.5% and buying them.
So, one way to keep interest expense down is you do it artificially. It probably isn't a long-term solution, but long-term for a politician is the days to the next election. And so, all they care about. So you could do that yield curve control. They're talking about that. Another thing you could do is something that's much more radical and I've gotten almost universal pushback on this, but I've got an ace up my sleeve on this thing that I've come to learn subsequent to me cooking up this potential idea. I've actually learned some history of it. And that is you actually say, you know what, we used to have 1.8% interest rates. Now the average Treasury rate is up at about 3%. Since no interest rate is at 3% or lower, we're about 100% higher than the aggregate coupon on the bond market. So, it means that even if you don't have a deficit, which we're running about a $2 trillion deficit, even if you didn't add anything, you have higher interest expense. For example, in the next 12 months, there are 10 trillion of Treasury bonds maturing. If the rate goes up 1% that's another hundred billion dollar in annual interest rate expense. We've already had interest rate expense go from $300 billion about a decade ago to $1.2 trillion, $1.3 trillion depends what exact fiscal year you look at. And so the interest expense problem's already gone up by a trillion dollars.
So what could you do? Well, one thing is say, you know what? We wish we hadn't gotten ourselves in this situation, but we're going to do something. We're going to restructure the Treasury debt. We're going to take every Treasury bond that has a coupon greater than one, and we are announcing today that that coupon is now one. And everyone that's below one, we'll let you keep your below one coupon. So, we're going to basically take the coupon down. Now, one thing that would do since the interest expense is already up at around 3% or so headed towards 4%, what would happen is if you could cut from 4 to 1 or slightly less than one on average, you'd cut 75% of the interest rate expense and that would buy you another who knows how many years to build it back up and kick the can further down the road. People say they would never do that. It would be a total disaster for everybody that owned a bond that had, if you owned a 20-year bond that was at, it probably was a 30-year bond issue 10 years ago, but it's still out there as a 20-year bond. If you had one of those with a six coupon and it turns into a one, you're going to have something like an 80% loss overnight. And it's a non-recoverable loss because it's not like, well, when's it going to recover? They're not going to give you your coupon back. They're taking it away as an economic management tool.
They couldn't. And that's why it's actually not a bad solution because it forces you to go cold turkey. Nobody wants to go into withdrawal. We've got all of this, the economy is operating with all this interest expense. Everybody sees that the trajectory is really scary, but they don't want to go into withdrawal. So they don't want to go to rehab, but this 1% restructuring from every coupon down to 1%, it would make it so you couldn't borrow any money for probably two generations. So it's tough love, right? So you say this is never going to happen. Well, I've got news for you. It happened in 1881 in the United States under President Garfield. It happened. They basically were saddled with Civil War debt and the Civil War debt was around 6% coupon. It's a crazy coincidence because I picked this 6% as a thought experiment back when I came up with this radical idea and it turned out to be that's exactly what happened. It was at 6%. They didn't drop it to one under the Garfield administration. They dropped it to three and they gave people a choice. They didn't say we're turning your coupon from six to three. They said, 'You can either turn your coupon from six to three or we'll buy you out right now. We'll pay you cash. We'll redeem your principal.' That's the same thing. If you've got a bond that has a 6% coupon for the next 6 years and they give you a hundred back, you have to reinvest at existing interest rate levels, not the legacy interest rate. So, you're reinvesting at three anyway. So, it doesn't matter. You're going from six to three one way or another. One you're taking a principal hit and the other you're taking an interest hit, but they're actually identical.
Niall Ferguson, who's a well-known and well-respected economic thought leader, he often talks about Ferguson's Law, and you might think that it's Niall Ferguson's Law, but it isn't. It's just a weird coincidence. It's actually Adam Ferguson's rule and he lived from 1723 to 1816. So this goes back a long ways and he came up with the idea that any great power that spends more on debt service than on defense risks ceasing to be a great power.
So there's this trigger point when you're spending more on interest expense than you are in defense. And he goes back, he used at that time a couple of historical examples. One was the Spanish Empire in the 1500s who had a crazy thing. They had 50% of revenue going to interest expense and unbelievably over 20 years it went to 87% of revenue going to interest rate expense. Obviously, the empire collapsed under that because they didn't have any money for their military anymore and there was of course a lot of corruption. Whenever you have that much debt and that much interest expense, unfortunately, it invites a lot of corruption as we've seen all over the United States in more glaringly obvious terms in the past year or two. But basically there was another example of an empire that did that during Adam Ferguson's lifetime and that was France, the Bourbon royalty who went to 50% of revenue going to interest expense and they got guillotined for that and other things. And then there was the Ottoman Empire which in the late 1800s got to 50% and they were gone by 1922. And then you had Britain in the aftermath of World War I with the same thing that sort of happened. So where's the US now? Well, the US now is at 20% of revenue, a little higher than that, but it rounds down to 20% of revenue going to interest expense. So our revenue is 5.4 trillion. Our budget is about 7.3 trillion. So there's that big deficit in there of 1.9 trillion that's going to keep being ladled on. And the interest expense is already 1.2 trillion. And absent interest rate decreases that would be really effective, well, then you know it's going to keep going higher.
It will happen when you have contracting GDP. It will happen very rapidly when you have contracting GDP because of course that's a double whammy. You have decrease in tax receipts and you have tremendous increase in expenditures for unemployment insurance and everything else. I believe that it's almost certain that we would have by 2030 an economic contraction and I believe therefore that we're going to be in trouble by 2030. My own base case is actually 2029, something like that, but who knows with precision on that.
When I started this business, it's 45 years ago or more now maybe even, people talked about the bad path that Social Security was on. We're doing a spend-as-you-go and the baby boomers one day would be not paying into the Social Security premiums, they'd be taking out of the system and they're an outsized population. So they said in like 1980 this is unsustainable, this is going to be a problem. And the CBO, who makes some fairly optimistic but not absurdly optimistic projections, they said the Social Security trust fund will be broke by 2060. So people are like, okay, we got ourselves an 80-year problem here. Whatever, I'm not going to worry about an 80-year problem. I'll worry about my four-pack a day habit 30 years from now. My smoking habit. So we won't worry about that. So then 10 years goes by and you get to 1990 and they have to do a new calculation because their assumptions had been as they always are a little optimistic. And so they say, you know what, it's not 2060 anymore. It's 2050. All right. So now we got a 60-year problem. Still not going to keep people up at night. And then we go to let's just say 2020. We have a stock market problem. We had the global financial crisis comes in the middle of the 2000s and all of a sudden, uh-oh, they're going to run out of money by 2035, 2040, you know, and now they're basically saying we're going to run out of money by 2032.
That's the Social Security Administration now. They assume no recession. They assume deficit lower than it is. They assume interest rates lower than what they are now. And maybe they'll be right if we got the right certain policies that maybe the president wants, but it's no longer your grandchildren's problem. It's right here and now, and we're going to have to deal with it.
So, this is what it's really about. And meanwhile, I'm struck so much by how ingrained even very experienced, well-regarded economists are in the old pattern. Fed cuts rates, all rates come down. I was watching a podcast with a guy who's pretty good. It's a nice podcast because it's only about 20 minutes and he's a straight shooter, you can understand what he's saying. And he was talking about how housing would be more affordable if interest rates were pushed down by the Federal Reserve. But I don't know. I mean, they can't really control long-term interest rates. And he pointed out even in that podcast a couple of months ago correctly, they've been cutting rates 175 basis points but the long-term interest rates are up and the 30-year Treasury rate is up 100 basis points. But he couldn't help himself slipping into the old way of thinking because about 10 minutes later in the podcast, he said, 'Well, maybe we can get mortgage rates down if the Fed cuts rates the way Trump wants.' I mean even somebody that respectable and that capable of thinking fell back into that pattern. So I don't think manipulating interest rates is going to make housing more affordable because markets function. You know, if somehow by magic you could get the mortgage rate down from a little under 6% now to a little under, let's just pick a number, a little under 4%. So down 200 basis points through some magic, maybe bond buying or something or other. All that would happen is home prices would go up. It's a supply and demand problem. It's not an interest rate problem. If you cut interest rates, you're going to have home prices go up. Look what happened during COVID, housing prices soared. They had interest rates right flat on the map way longer than they should have. They had a Fed funds rate at zero all the way into 2021. I remember Super Bowl Fed meeting 2021. I remember saying the Fed should raise rates 200 basis points today and they raised them 25 basis points. And that's why I came up with this phrase just off the top of my head: Jay Powell needs to paint or get off the ladder. Either do your job, let somebody else get up on that ladder and do the job for you. And he finally got into sync on a very belated basis. But you'll notice that home prices didn't go down. They stayed sticky and they haven't really, they've come down in some areas that were overheated but not by any significant amount. What you need is supply and you need supply that isn't so expensive.
I've been traveling. I haven't seen the specifics of it. I mean I think increasing supply is good but when the government increases supply using government methodologies a lot of the ideas will filter through money laundering schemes.
