What is "Quantitative Tightening"?

Donnie talks a lot about Quantitative Tightening and how the Federal Reserve Board are idiots for implementing it. He makes it sound like it's a terrible policy and that the Federal Reserve Board of Governors are idiots for implementing it.  His tweets suggest that without this nefarious policy our economy, which he claims is setting records, would be doing even better. But what is Quantitative Tightening? 

To understand what it is, we first have to go back to, and define, Quantitative Easing. 

In 2008, The Federal Reserve Board (“The Fed”), in order to counter the effects of the recession, purchased several trillion dollars of assets (explanation of “assets” to come) from commercial banks. This had the effect of injecting several trillion dollars of cash into the economy. Cash that could then be used for investment by way of loans. This was an unprecedented move, and was one of several by The Fed and by the Obama administration used to get the economy back on its feet.

The assets took the form of debt that these commercial banks held. This debt in turn usually took the form of government securities. When these securities matured, the cash, which if the securities had been held privately would have been paid to private holders of the securities, went back onto The Fed’s balance sheet, and out of the public circulation. It was a temporary boost to the overall national cash flow. 

What The Fed is doing by “quantitative tightening” is allowing these debt assets to mature and not buy more to replace them. In other words, allowing things to get back to normal. It isn't so much a new policy, but allowing an old policy to expire without renewing it. 

Here’s an illustration that may help:

You are 23 years old and you just lost your job. You’re able to find employment, but at a lower rate of pay than your previous job. However, your bills remain constant and you have a $300/month shortfall. To help you get through this setback, your parents agree to cover your monthly car payments for you, which are $300, and do not require you to pay them back. Two years later, you have found a new job, which pays more than what you made at your previous job. Your parents continue to pay your car payments for the year left on the loan. You now have a surplus, which you use to move into a nicer apartment. All of this is equivalent to Quantitative Easing.

Three years later, you have fully recovered from your financial crisis and you no longer owe the bank anything on the car loan. You decide that you would like to use the rest of the surplus that you have accumulated to buy a new car and trade in the old one. Your parents are happy to see you back on your feet and are glad you are not asking them to cover the new loan. That is Quantitative Tightening.

What Donnie is asking The Fed to do is equivalent to you asking your parents to make payments on your new car loan, reasoning that even though you are doing so well, and have some money to put into savings, you would be doing even better if you had a new car and your parents paid for it. Granted, the analogy is not perfect. In the example, you are not selling anything, while in reality the banks are selling assets that they hold. Donnie is asking The Fed to continue to prop up an economy that no longer needs to be propped up.

I'd be willing to wager that Donnie has no idea what Quantitative Tightening actually is and is basing his opinion on the name, which admittedly sounds kind of scary. It took me less than a half an hour to look up the definition of Quantitative Tightening and Quantitative Easing, find examples, get opinions of various economists and get myself up to speed on the whole picture. If only we had a president who took the time to educate himself before spouting off.