Americans came back from their Independence Day holiday…and found their Empire of Debt in worse shape than ever - $1.6 trillion in potential losses from the credit crunch!

Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM) are to America's great empire what the East India Company was to the British Empire in the 19th century…and the Louisiana Company was to France in the 18th. Huge, stupid, and probably fatal.

Freddie and Fannie are huge government-chartered mortgage lenders. In 18th century France, speculators bet on the riches of Louisiana, through the government-chartered Louisiana Company. In the 19th century, they wagered their money on the riches of India, through the government-chartered East India Company. And in the 20th century, they gambled on rising housing prices through Fannie and Freddie.

Yesterday, the twins got spanked hard. Freddie lost 18%. Fannie took a 16% hit. The stock fell to its lowest level since 1995, wiping out every penny of gain from the housing bubble. Sic transit gloria pecunaria. Or something like that.

The immediate problem is that the mortgage lenders are running out of money. They need to raise $75 billion. A few years ago, that would have been no problem. Everybody was ready to put money into America's go-go, securitized housing market. But then, housing went.

Yesterday's news tells us that housing prices are falling in 23 out of 25 U.S .metropolitan areas. That, according to Case/Shiller. Foreclosures are still rising at a faster and faster pace. Etc. Etc.

(We're sparing you the details…we don't want to upset you too much, dear reader.)

So now, Freddie and Fannie have a problem. They need to raise money - a lot of it. And now it has become "very difficult," say the experts, to raise that kind of dough. Investors are slowly putting two and three together. The pair of mortgage lenders needs more cash. Their industry is in full flight. Their capital is disappearing. Their collateral gets marked down every month: "Hey, maybe we should sell the stock!" The result of these deliberations was a bad day on Wall Street for the twins, bringing total losses into the billions for remaining stockholders, who were too slow or too dull to sell their shares.

Overall, the Dow lost 56 points…and oil sold off $3.48, but remained above $141. Commodities fell…with the CRB down 19 points. And gold, too, got whacked for a $4.80 loss, bringing an ounce of gold to $928.

Everyone is waiting for the top in the oil market. We don't know where it is, anymore than anyone else. Our only advantage is that we know it is there somewhere. Oil is a useful commodity. It responds to the laws of supply and demand. Every roughneck with a rig is now drilling down and trying to get more oil to sell. And every motorist, industrialist and householder is looking for ways to not buy it. Somehow, somewhere they'll bring the price down.

Wait…oil also responds to money. We saw an estimate yesterday that 25% of oil's price increase since 2003 was because of the dollar falling against foreign currencies. What about the other 75%? That too, is probably largely a feature of a dollar that is losing its purchasing power against consumer goods and raw materials. All paper currencies are going down; prices rise. For the last 100 years, the oil price has tracked - more or less - changes in money supply growth. As M3 increased, so did the price of oil. Currently, the money supply - as measured by M3 - is increasing at an annual rate of about 18%. Oil is going up - on a 10-year moving average basis - about 23% per year. Looked at another way, from 1974 to the present, the price of oil has gone up a bit more than 14 times. M3, meanwhile, has gone up a bit more than 11 times.

What does this mean? Please don't get us mixed up with someone who knows, dear reader. We're just guessing. But our rough guess is that oil is a bit overpriced anyway you look at it. And as it responds to normal market signals, it is bound to be beaten down.

But let's return to our story. Poor Freddie and Fannie! They need to raise money. And if a report leaked from Bridgewater Associates turns out to be correct, so will a lot of other businesses…and governments. Bridgewater's confidential memo - which got out to the Swiss press and then made its way to Ambrose Evans-Pritchard at The Telegraph in London - says that losses from the credit crunch could go as high as $1.6 trillion…four times as high as official estimates from the IMF.

And it only gets worse…

*** One trillion, six hundred billion dollars is a lot of money. If Bridgewater is right, the whole financial sector will be gutted. You'll remember, dear reader, after manufacturing pulled out of America, the financial industry was left. And retail. Housing. Services. And not much else. The center of economic power shifted from Detroit and Trenton - where they made things - to Manhattan, where they financed them. Mothers ceased wanting their babies to grow up to be CEO of General Motors; they wanted them to go to Wall Street. That's where the real money was. Finance was the key not only to huge profits itself, but also to the growth of the retail and housing sectors. People bought durable goods and consumer goods on credit. No credit; no purchases. No purchases; no consumer economy.

Well, now GM (NYSE:GM) has lost 75% of its value…and the financial industry is not far behind.

Well, Bridgewater goes on to say that a $1.6 trillion loss in the financial industry will mean a loss of $12 trillion in credit to the economy as a whole. When the lenders don't have capital, they can't lend it out. Typically, they lend $10 for every dollar of capital. So if a dollar of capital is wiped off their balance sheets, as much as $10 of credit is erased from the economy.

Here at The Daily Reckoning headquarters in Europe, we're used to high prices. One billion? Heck, we spend much that on lunch. But $12 trillion begins to sound like real money. And $12 trillion taken out of the U.S. consumer economy begins to sound like the Great Depression. Like Japan, 1990-2006…only worse. Collapsing asset prices. Rising unemployment. Bankruptcies. Defaults.

Of course, no central bank or government will go into that good night without a fight. The Fed will cut rates…and lower reserve requirements…and probably intervene directly in markets. Banks will be effectively nationalized…as has already happened with Northern Rock in Britain. The federal government will increase borrowing and spending to try to offset the money disappearing from the markets and the economy. Yesterday, we mentioned $1 trillion deficits. Think $2 trillion deficits. Maybe more.

What about the foreigners? What about Sovereign Wealth Funds? They've got a lot of money. Couldn't they help recapitalize the credit system? Alas, the SWFs have only $3 trillion currently. And the foreigners? Our guess is that when they realize what is happening they will be desperate to get rid of dollars and U.S. paper of all sorts. Instead, they'll want real resources, factories, brands, concrete and land. And they will have a great opportunity. As asset prices fall, they will be able to buy more valuable properties in America at bargain prices. Already, Abu Dhabi bought the Empire State Building. A Belgian brewery, run by Brazilians, is buying Budweiser. More to come…

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.