of it was sold more than a decade ago. so in principle, if this were ever the aim of policy makers, there ’ d seem to be quite a bit of scope to spring “ surprise ” inflations ( a surprise in the sense that it wasn ’ t foreseen when the bonds were originally sold ) and reduce the real value of existing debt without any compensating rise in coupon payments. however, as we ’ ll see, you need relatively sizeable increases in inflation to make much of an impression on the debt. though the dynamics are extremely drawn out, the effect is ultimately temporary, as even longterm debt needs eventually to be refinanced12. and central bank asset purchases have made it harder : because it reduces the maturity of its interest - bearing liabilities, qe actually makes the public sector ’ s consolidated balance sheet less susceptible to any given rise in inflation. note that this relies critically on trend gdp growth ( let ’ s call it g ) being higher than the risk - free real interest rate ( r ). over time, and as long as inflation is on average in line with prior expectations, the change in the ratio of debt to gdp ( b ) is given by ( r – g ) b – d, where d is the primary deficit. this is stable – for given d it tends over time to revert to a steady state level ( b * = ( g - r ) / d ) – only if the term multiplying b is negative, i. e. g > r. with risk - free real interest rates comfortably below zero in developed economies this condition seems to be fulfilled at the moment, though that ’ s not always been the case. when r > g the debt ratio is no longer stable – unless d changes accordingly, small changes in r or g would put b on an unstable path. for more on the implications of g > r see blanchard ( 2019 ) and mehrotra and sergeyev ( 2019 ). all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice the blue line in chart 8 depicts the results of a stylised experiment in which inflation rises permanently, and without any warning, by 1 chart 8 : surprise inflations can reduce public sector debt though when g > r the effect is ultimately temporary percentage point ( from 2 % to 3 % ). there ’ s a corresponding rise in inflation expectations

with nothing better to do. ” 7 nor would norman necessarily have ingratiated himself to today ’ s army of bank economists. “ you are not here to tell us what to do, but to explain why we have done it ” is the way norman rebuked the bank ’ s chief economist of the day. 8 roberts, reading and skene ( 2009 ). john, roberts and weeken ( 2012 ). boyle ( 1968 ) p105. ahamed ( 2009 ) p233. bis central bankers ’ speeches norman saw the bank ’ s role in expansive terms, as provider not just of emergency help but as builder of infrastructure and supporter of industry. the bank became part of the post - war reconstruction effort. having spent 200 years tending to its back garden, the bank began to explore pastures new. to take one example, in 1928 the lancashire cotton industry was on its knees. these problems risked ricocheting back to the financial system, with at least two of the big five uk banks up to their neck in cotton. 9 a plan was conceived involving consolidating the industry into a lancashire textile corporation. this was to be financed with debt and shares issued and supported by – you ’ ve guessed it – the bank of england. it was a bold and cunning plan. unfortunately, it flopped. the share issue by the corporation in 1931 was a resounding failure, leaving the underwriter with a large chunk of the shares. the bank ended up having to support the market. 10 it, too, found itself up to its neck in cotton. undaunted, the stage had nonetheless been set for the bank ’ s on - going involvement in financial infrastructure. this came not a moment too soon. in the immediate post - war period, the uk faced pressing financial infrastructure problems – the so - called “ macmillan gaps ”. these gaps referred the inability of small firms to finance themselves with long - term loans. if these gaps sound strangely familiar, then they should. the post - war bank set about closing these macmillan gaps with gusto. in 1945 it set up two new financing entities – the finance corporation for industry ( fci ) and the industrial and commercial finance corporation ( icfc ). these were financially supported by banks and institutional investors, providing a platform for the supply of longer term funding and venture capital finance to small firms. in 1973, the two corporations combined to form finance for industry ( ffi ). during the early 1980s, the company