We study optimal policy in an economy in which the real interest rate on public debt is low because public debt serves as collateral or buffer stock. Issuing more public debt can raise welfare by easing the underlying friction; but it also reduces the premium that the private sector is willing to pay for this service, which in turn raises interest rates. This trade off shapes the optimal long-run quantity of public debt. It justifies larger deficits during financial crises. It may subsume other considerations, such as whether public debt crowds out, or in, capital. And it clarifies the circumstances under which a low risk-free rate represents an opportunity for cheap borrowing by the government.