What happens to the Fed's liabilities?
How does it make sense for the Treasury to hold Treasuries?
Like I said the Fed's liabilities aren't real liabilities.
According to who?
According to the fact that outstanding Federal Reserve Notes are paid back to the bearer with... Federal Reserve Notes. IOUs paid back with IOUs.
Yet I can exchange it in the economy for goods and services, so clearly it exists.
Correct but that's neither here nor there; we're talking about the US gov's repayment obligations in regards to outstanding USDs not the value of USDs as a medium of exchange.
The bulk of the remaining liabilities are written off with the MBS assets just as easily as they were created out of thin air.
The Treasury would hold Treasuries in reserve so that they can sell them in times of emergency e.g; if we had to engage in a legitimate war.
The Treasury can't "hold" Treasuries anymore than you can hold a debt to yourself.
The Treasury has the sovereign authority to do whatever it wants with its own debt securities.
I understand that these aren't the easiest concepts to wrap your head around. It's even harder trying to explain them. This is a really good essay that might help to put things in the proper perspective:
Why China must buy US Treasuries with her Trade Surplus Dollars