Two Types of Economic Destruction
Credit events destroy the global balance sheet, while industrial revolutions destroy the global P&L. One kills accumulated wealth, the other kills the ability to create it. First is sudden, latter is gradual.
There's a profound difference between watching your house burn down and watching your profession become obsolete. Both destroy wealth, but in fundamentally different ways. Understanding this distinction explains why we keep applying the wrong solutions to economic crises.
The framework is simple: credit events destroy the global balance sheet, while industrial revolutions destroy the global P&L. One kills accumulated wealth, the other kills the ability to create it.
Credit events are sudden revelations that we've been living a lie. In 2008, mortgage securities worth trillions turned out to be worth a fraction of that. These are stock adjustments—the wealth we thought existed simply didn't. The violence comes from leverage. When banks lend ten dollars for every dollar they hold, a ten percent asset decline doesn't mean ten percent losses. It means insolvency. Everyone scrambles for cash simultaneously, credit vanishes, and the money supply contracts. Financial systems can collapse in weeks.
Industrial revolutions work differently. They're flow adjustments that change how value gets created. Newspapers didn't wake up to find their printing presses worthless—they watched their classified ad revenue slowly bleed to Craigslist. Kodak saw digital photography coming for years. The cruelty isn't surprise but inevitability. You see the tsunami coming but can't outrun it.
This distinction matters because the remedies are entirely different. Credit events need immediate liquidity injections and bank recapitalizations. Print money, guarantee deposits, move fast enough, and you can stop the deflationary spiral. The Fed proved this in 2008—TARP, QE, zero rates. It wasn't pretty, but it worked.
Industrial disruption laughs at monetary policy. You can't print your way out of obsolescence. When AI eliminates entire job categories, lowering interest rates doesn't help. These transitions require different tools: retraining, industrial policy, maybe even restructuring how we distribute economic gains.
The victims differ too. Credit events primarily hurt creditors and investors—those with capital to lose. Industrial revolutions devastate workers and entire regions built around obsolete industries. Detroit didn't collapse overnight; it bled out over decades as its competitive advantage eroded.
Our current moment is particularly treacherous because we face both simultaneously. Global debt levels suggest an overdue credit event—some sudden recognition that assets aren't worth what we pretend. Meanwhile, AI represents perhaps the most significant industrial revolution since electrification. We're navigating balance sheet stress while managing technological disruption.
This creates wicked problems. Monetary tools for credit events may inflate bubbles while ignoring technological unemployment. Fiscal stimulus might prop up zombie companies that technology has already killed. Different groups fear different destructions: asset owners fear sudden revaluation, workers fear slow obsolescence. They need different policies, creating seemingly incoherent political coalitions.
Most dangerously, we keep using yesterday's tools for tomorrow's problems. Central banks have the credit crisis playbook down pat, but they're using it for technological disruption. QE might stop a banking crisis, but it won't help a truck driver whose job just got automated.
The key question: Is this a balance sheet problem or a P&L problem? Is wealth being destroyed or redistributed? Credit events need financial triage. Industrial revolutions need economic transformation. Conflating the two guarantees policy failure.
As we face potentially both crises, getting this diagnosis right isn't academic. It might determine whether we adapt or collapse. Credit events destroy stock—plug the holes, and those with credibility survive. Industrial revolutions destroy flow—there are no holes to plug, only the fittest survive.
The medicine must match the disease. Otherwise, we're just rearranging deck chairs on a ship that's both sinking and obsolete.
© Saip Eren Yilmaz, 2022
