How can the worst retail holiday season in years get worse? It can become the worst holiday season since anyone kept accurate records.

There have been signs for several weeks that e-commerce and store sales were falling at single digit rates. But, as each day passed, the industry hoped that discounts would lure shoppers back into stores for that one final spending spree.

According to new information from the Mastercard SpendingPulse poll, sales in some retail categories were down more than 20%. Reuters says that apparel sales in outlets such as Gap (GPS) were off 19.7% and electronics sales at chains including Best Buy (BBY) plunged almost 27%.

One "benefit" of sales being down this much is that the overcapacity in retail built up during the latest period of easy credit will be washed out of the system. The strongest companies will be able to raise prices faster in a recovery without the weakest firms driving discounts to reduce inventory.

Recently, the nation’s biggest retail association suggested "tax free" periods set up by the government to drive sales for periods of several days at a time. That could also drive an increase in debt in already overextended consumers. The by-product of the plan could lead to more credit card defaults.

The retail industry is not going to be saved. Unlike the auto and financial sectors, the government is going to allow the stragglers to fail. The number of stores in the US could drop by tens of thousands and big struggling chains such as Circuit City will disappear.

The federal government may want to save every part of the economic system, but Darwin has come to Washington.

Douglas A. McIntyre

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