So in the end this is the best desperate measure they could come with to remove gear from the economy? Gear transforming in stat bonus for other gear? It doesn't make sense to me as part of the game world and in the long run will probably become just another annoying factor to consider when balancing economy and battle.
I'd rather have stuff break from use than this...

If it were me i'd make material drops much more rare and make some of the materials used in making certain gear be recoverable when it breaks. Furthermore i'd make gathering materials from monsters an action you have to select and execute instead of it happening automatically. This way people who only care for fighting won't bother with low level materials and won't gather them from monsters they kill, which also solves inventory cluttering and removes some of the materials sold in the wards. To complete this i'd increase the skill points from a single craft so people don't need to craft so many items of the same tier et voilà, there are less useless items in people's inventories and less gear in circulation.
Regulating wear/break rate and drop rate to adjust economy as needed would be easy then. With the materia system it just becomes harder.