<p>How can high and rising public debt coexist with persistently low interest rates and subdued growth without triggering fiscal instability? This paper addresses this question by developing an endogenous growth model with financial frictions, in which the supply of liquid assets plays a central role in determining interest rates, growth, and fiscal sustainability. In our model, both low interest rates and slow economic growth arise from a common source: liquidity shortage. By expanding the supply of liquid assets, public debt can raise average returns on wealth, thereby promoting long-run economic growth. Applying the model to the Japanese economy, we show that the economy is currently in a scarce-liquidity regime, in which the insufficient supply of liquid assets gives rise to low interest rates and slow economic growth. Our analysis also explains why interest rates on public debt have declined persistently despite the increase in public debt. We apply our model to evaluate effects of fiscal policies aiming at positive primary surpluses.</p>