A week from now, the rate at which Bermuda charges foreign currency purchase tax (FCPT) will double. A few letters have been received on the subject. The main thrust is whether Bermudians would do well to exchange their Bermuda dollars now, rather than wait, but the change raises larger issues.

The FCPT effectively devalues the Bermuda dollar. It is not convertible at 1:1 with the US dollar; from next week, it will be .995:1. To weaken your currency for a yield of a few million bucks at a time of unprecedented boom is a curious choice.

Bermudians know that they must preserve rainwater when it falls, to get them through the days to come when no rain will fall. That knowledge is bred in the bone when it comes to water; why doesn’t the same apply to money?

The news that FCPT is going up is hardly a surprise. It is in the nature of taxes to increase. Generally, they rise until they become unsustainable, and then a populist politician is elected who vows to cut taxes. (Or a sitting politician attempts to buy favour with tax cuts, as British Chancellor of the Exchequer Gordon Brown did this week.) The politician is elected and cuts taxes, and then the economy tanks, since few governments ever reduce their head-count. Taxes then resume their upward spiral.

Currency controls are a related subject. Down the ages, countries have tried to manage their currencies by imposing various limits and taxes on currency trades.

These measures often prove inefficient.

The most ridiculous in my experience was a 1960s British law that limited to (about $50) the amount of money that Britons could take with them on a foreign vacation. People simply smuggled money in their socks.

Bermuda’s FCPT has nothing to do with currency control. The Bermuda dollar is already worthless overseas; banks won’t take them. FCPT is about raising money to pay for running the Government. The increase in FCPT won’t raise much: $3 million a year, I think.

But it doesn’t hurt much: even at 0.5 percent, it’s still only 50 cents per $100. (The bank takes 43 cents per $100 on top as a transaction fee.)

The tax mostly affects expatriates who are paid in Bermuda dollars, but Bermudians who pay for their children’s overseas education are not exempt, and nor are Internet shoppers who earn Bermuda dollars.

The FCPT is perhaps the least important element of the decision to convert currency. If everything else is equal, and it makes no difference whether you sell your Bermuda dollars next week or the week after, sell them next week. If selling them next week in any way threatens the purpose of the transfer, I wouldn’t bother.With apologies for the delay in getting to it, I must now answer a letter on mortgages.

In a column a few weeks ago, I wrote disparagingly of banks offering 100 percent mortgages. That prompted the following letter:

“I am looking to purchase a home for my family, but circumstances have required me to dig deep into my finances, leaving me very short in the down payment area. Hence my thought of 100 percent mortgage financing. I have a very good job and take home (net) between $7,000 and $8,700 per month. My wife nets around $3,500 per month as well. Our monthly expenses tally $3,675, which I believe puts us in fairly good stead to buy a home.”

Bermuda banks have applied few limits to mortgage lending. They have, between them, lent their entire stock of Bermuda dollar assets for mortgages, and have lately started lending some of their US dollar deposit base into Bermuda dollar mortgages. Now they give 100 percent mortgages.

One outcome is soaring house prices in Bermuda, another probably unsustainable element of the economy. Let’s assume for the moment that the banks knows what they are doing and focus exclusively on the reader’s question.

The reader claims to have income of at least $10,500 a month, and expenses of $3,675. The latter figure, for a couple, seems very low. I live in a disgusting hovel on the airport runway and never go out after dark, and I spend more than that. But, if the numbers are right, this couple can afford to borrow a considerable sum of money. They are a banker’s dream.

Once they buy a home, their expenses will increase significantly. Apart from the mortgage payment, there will be land tax, repairs, new furniture (I’m guessing) and so on. Should they buy a home, they would be making a long-term commitment to repay.

The reason banks used to cite for wanting to see a hefty deposit was that it was proof of financial discipline. If this couple had saved $6,500 a month for a couple of years, they would have better than $150,000 to show for it, and they would have experienced what life is like with a huge monthly bill to pay. Interestingly, had they bought a home a few years ago the dire financial circumstances referred to in his letter would probably have forced the couple to sell their home.

I don’t give advice, but I would say this: if this couple can’t afford to buy a home in Bermuda, then the whole thing makes no sense. I’d like to see them borrow only so much that they have $1,000 or $1,500 a month left to save, on top of paying all their bills. That way, they might be able to ride out the next financial storm that hits them.

Sinking every penny they have into expenses will leave them no room for manoeuvre — and then they’d resemble the Bermuda Government. No one should be that foolhardy with their own money.

Foreign currency