There's one economic aspect of Japan's earthquake, tsunami and nuclear disaster that seems to be getting lost in the rubble, and that's the effect on prices. Yes, prices. Remember them? You'd never know it from the analysis of what Japan's triple-whammy means for the domestic and global economy.

A natural disaster qualifies as a supply shock. For the graphically inclined, this is represented by an inward shift, to the left, of the supply curve. It describes what happens when producers provide fewer goods at any given price than they did before. The result is lower output and higher prices.

An increase in prices may be a desirable outcome for Japan's policy makers, who have been battling mild yet persistent deflation for more than a decade. It may not be optimal for others. The European Central Bank was already making noises about raising its benchmark rate, currently at 1 percent, at its April meeting before disaster struck. Recent comments by ECB officials suggest Japan's crisis hasn't changed their thinking. With inflation running at 4.4 percent in the U.K., investors expect the Bank of England to raise its base rate by 25 basis points in July, according to forward contracts on the sterling overnight interbank average.

Shocked by Supply

The ex-post analysis of Japan's devastation is similar to that following Hurricane Fill-In-the-Blank (Katrina, Andrew, Floyd), which invariably focuses on the hit to spending and economic growth. In other words, what is really a supply shock resulting in higher prices is viewed as a damper on demand, which would have the opposite effect.

The first-order effects of natural disaster are a loss of income, production and output. If a factory is destroyed, employees can't report to work. Production is halted, and cars stop rolling off the assembly line. If regular distribution channels are disrupted, manufacturers have to find alternate (read: less efficient, more expensive) means of transporting goods from one place to another. Prices rise. Japan fits this model to a tee. Toyota, Honda and Nissan, the three largest Japanese auto manufacturers, halted operations at many plants following the earthquake and power disruptions, and are only now starting to restore production.

The effect isn't limited to Japan, which is a net exporter. A shortage of Japanese-made parts, especially electronic components, forced General Motors to suspend production or cut shifts at facilities in the U.S. and Europe. Just-in-time inventory management means just-not-enough parts on hand to ensure a normal pace of production even at functioning facilities.

David Fuller's view "This is from a client who is a former U.S. Nuclear Sub Captain:

Below is a quick summary that I sent a week ago to a friend. You may find it useful.

Inside the reactor core, the uranium is inside fuel rods. The uranium itself is encased in pellets of Uranium Oxide U3O8 (don't ask me why I remember this nonsense). Oxides are used because they cannot boil (already in an oxidized state). The outer portion of the fuel rods are cladded, or plated, with a non corrosive metal (Zirconium). In common sense terms, the cladding keeps the fissionable material from leaking out. Water flows past the fuel rods, the water heats up. The Japanese Reactor is a Boiling Water Reactor, so the reactor is the steam generator. The Navy uses pressurized water reactors, where the water in contact with the fuel rods passes in a tube through a steam generator, and that is where the water is boiled. In Google, call up PWR reactors. On a separate window, call up BWR reactors. They have a good diagram to see the fundamental differences.

I won't get too geeky here, but in the PWR, when the pressurized water gets too hot, its density goes down (common sense, steam is less dense than water). When the water goes by the fuel, it acts as a mirror that reflects and slows down fast nuetrons to make them slow nuetrons. These slow neutrons crash into the uranium and cause the nuclear fission (splitting the atom). In a PWR, if the water in the core gets too hot, or there is no water, not enough neutrons get reflected back at the uranium, and the self-sustaining reaction shuts down. It is "inherently stable".

The Japanese plants are BWR's, which have many thermodynamic, cost, and useful life advantages. The one disadvantage is that because the water is boiled in the reactor, it does not have this inherently stable reflector effect. This is not to say that the Japanese did not insert the control rods (a neutron sponge that stops the reaction) to shut down the reaction. They did. But in that space of time the fuel rods were more likely to reach what is know as peak centerline temperatures. This will put an initial stress on the rods. When there is no cooling water, the rods keep heating up. That happens in a PWR reactor as well. It is known as decay heat. It is just a question of degree.

That is what is happening. When you keep heating up, you can breach the cladding and release fissionable material. The term "meltdown" is that you are deforming through heat the metal. The containment building normally keeps that in (hence the name. Sorry I ended the sentence with a preposition, but I am writing quickly). The explosion was caused because of the separation of H2O. You were left with free hydrogen and oxygen. Hydrogen gas is highly volatile, and that caused the explosion, which took out the containment wall. So now you have fuel rods heating up, cladding breaking down, and no containment.

The Japanese took the extraordinary step of flooding the reactor with seawater. Seawater is highly corrosive. That means they are writing off the reactor. It also means buildup of hydrogen gas (hence the second explosion), and the buildup of chlorine gas (the salt, NaCl, is separated, the Cl combines to form Cl2). Does not explode, but very poisonous.

How much area affected? Depends upon how much fissionable material is released. This stuff does get overblown in the sense of idiots on the news saying it will make a wasteland of northern Japan. It is serious, and you have to contain the fissionalbe material. Humans are exposed to radiation everyday. Bananas will set off a geiger counter becasue of the natural decay of potassium 60 (K-60). It is a question of what type of radiation (gamma, alpha, neutron), and the level. It affects kids and unborn fetuses more than adults due to their higher level of cell division.

This is a highly simplified explanation, but is covers the basics of what is happening