The dollar is a price

Matt Nolan's bemoaned that nobody quite seems to understand that exchange rates are just a price. He would love this particular example.

The story here is bad enough: the Greens calling again for bans on foreigners buying houses in New Zealand. They say it isn't racist, but when pretty much every complaint is around Chinese buyers, I call it a dog whistle.* It's particularly galling when it's smart-growth style, Green-supported policies that have forced the property supply curve to be near-vertical and have made it possible for increased demand to be met primarily by price increases rather than by supply increases. And kudos to Prime Minister Key for batting this one down, despite its populist appeal.

But here's one vox pop understanding of exchange rates. It's always a bad idea to read the comments section of anything (except Worthwhile Canadian Initiative and maybe sometimes this blog). But here's Veda's view on exchange rates, hoisted from the 3 News comments:

The wannabe property speculators are in full swing on this thread... All those who benefit from rising prices keep pushing the emotional spin about racism...

The reality is that foreign countries are manipulating their currencies lower (which pushes our higher) using whatever brute force necessary (low interest rates and massive currency sell offs) and the result is favorable terms for buying NZ property (as our high dollar makes land in NZ cheap when earning money overseas). This is driving NZ property prices well beyond fundamentals (what working kiwis can afford) and precipitates more NZ money flowing offshore (as more and more rentals are now being held by overseas interests). [rest truncated]

Where to begin. It's likely that one country's currency would be bid up relative to others' if others pursue devaluation policies. We can argue about whether it consequently means that New Zealand should follow suit, and I can't see how we can do it in any substantial way while staying withing the Policy Targets Agreement's inflation bounds, but at least that first part isn't completely mad.

But the point of devaluing your currency is to make other countries' products relatively more expensive. You discourage imports and encourage exports by effectively dropping your country's real wages: people from your country can't afford as much when the value of the currency drops. Because real wages drop, nominal wage rigidity doesn't matter as much and employment goes up. At least in the first order. It also makes intermediate imported industrial inputs more expensive and messes up a bunch of other stuff, but we'll take that as read.**

So here's a pop quiz. If we devalued to the point where $1 NZ = $0.01 US, would it become:
a) more expensive, or;
b) less expensive
for somebody earning US dollars to buy a house in Auckland?

Hint: every dollar earned by the American would count for $100 NZD when bidding at auction.

Veda wants to devalue the New Zealand Dollar so that foreigners will have a harder time buying Auckland real estate. And, obviously, rental income being sent abroad to foreigners is entirely offset ex-ante by those foreigners buying New Zealand Dollars to purchase the property in the first place.

Why oh Why does every vote count with weight of one?

* Dogs can hear dog whistles while people can't. Kiwis who hate the Chinese hear the Greens' dog whistle; those who don't, don't notice.

** Devaluation that's consequent to proper application of inflation-targeting policies I don't have a problem with. Monetary easing to keep inflation from being too low will have the consequence of devaluing the currency, but the devaluation isn't the point of the policy. And maybe devaluation is best policy if you've a massive foreign currency debt you can't otherwise repay. Otherwise, read Nolan, linked above.