"Not Minding That It Hurts"

Hasn’t the Iranian regime already shown it can withstand more pain?

Photo by Collection Christophel via Alamy

“Of course it hurts,” says the actor Peter O’Toole in the title role as Lawrence of Arabia as his fingers squeeze the flame from a match. “The trick … is not minding that it hurts.” Both Washington and Tehran are doing their rhetorical best to feign indifference to the pain from a naval blockade that has trapped a third of Iran’s budget revenues and a fifth of the world’s oil.

In Barron’s on Friday, I outlined how irrational stubbornness on both sides could push the global economy to the verge of recession with cascading disasters in certain countries and sectors. But record-setting stock prices suggest that markets believe this will soon force one side or the other to back down before calamity strikes. And the overwhelming evidence so far is that the Iranian regime either won’t – or can’t -- give in.

No, this argument doesn’t involve lumping Persians and Arabs into a big Middle Eastern pot of stoicism, fanaticism and zealotry. Rather, it refutes accusations from Defense Secretary Pete Hegseth last week that Congressional Democrats “and some Republicans” are going soft after just two months of war.

That’s more than enough time to reach a few solid conclusions.

First, for all the signs in the last year of rising opposition to the Iranian regime and for all the hopes that the U.S.-Israeli attack might trigger a popular rebellion, the current regime looks like it remains in full control. Some spark could still ignite a revolutionary flame, but that domestic chaos would likely keep the Straits shut even longer.

Second, bureaucracies are highly resilient to bombs. You can kill most of a country’s top leadership, but the regime will remain largely unchanged. In fact, the regime is probably more entrenched in its hostility to the United States and less able to make decisions of any kind. The only way the United States has ever changed another government for the better has been to send its army to install, train and supervise friendlier officials. This was done in Germany and Japan with great success; in Iraq, with mixed results. Not even the most hawkish hawks think occupation is a good idea.

Third, governments survive disastrous economies, especially when they can blame outsiders for their failures. Think of Castro’s Cuba, Kim’s North Korea and Putin’s Russia. Iran’s inflation may surpass current 50% levels, and its GDP may contract more than the 6% the International Monetary Fund projects this year. But after eight years of tightening sanctions and four decades of U.S. hostility, the government has proven deeply resistant to domestic economic chaos.

Fourth, Iran’s government has now shown itself highly resistant to military pain, too. Bombing its nuclear facilities did little to change its bargaining position. If striking more than 17,000 targets in March and April didn’t change the regime’s calculus, it’s hard to imagine how much more devastation and death might be required.

Fifth, while Operation Epic Fury has imposed enormous costs on the Iranian government and devastated its armed forces, it hasn’t eradicated its enriched uranium at the heart of its nuclear program. Intelligence estimates suggest half its ballistic missiles and associated launchers remain intact. And it has done little so far to noticeably tilt the balance of forces toward Israel as it struggles to eradicate Hamas and Hezbollah.

If the hardest thing for an investor is to sell a favorite stock that has gone wrong, the hardest thing for a political leader is to give up on a fight that isn’t going well. The more Trump’s backers argue that Iran is on the verge of breaking, the more they sound like a beleaguered portfolio manager hoping that next year’s earnings will improve.

But there’s a fine line between persistence and stubbornness. Sooner or later, every investor learns to ignore sunk costs and focus on the relative merits of adjusting strategies. This need not mean giving up on containing Iran’s aspirations for nuclear weapons or ending its support for regional proxies. But it does mean opening the Straits as quickly as possible before the blockade causes lasting damage to the global economy, America’s fraying alliances, and Republican prospects in the fall elections.

Trump may even be right when he insists that Iran is suffering more from this conflict than America, where growth is a steady 2%, and inflation has edged above 3%. But that’s different from understanding which side can better withstand the current pain, just as that pain is about to ramp up sharply for the U.S. and its main trading partners in Europe and Asia.

Right now, simply put, Iran minds less.