By Ambrose Evans-Pritchard

LONDON, England - January 2, 2012 - So we enter Year IV of the Long Slump, the cruelest yet though not the most acute.

There will be no Chinese credit explosion this time, no real help from post-bubble India or overstretched Brazil.

It will be a global downturn on all fronts, aborting what remains of recovery even before industrial output in the Organization for Economic Cooperation and Development bloc has regained its pre-Lehman peak.

The second wave will hit with youth unemployment already at 45% in Greece and 49% in Spain; and with the U.S. labor participation rate already at Depression levels of 64%.

We will hear more about Italy's Red Brigades, Greece's Sect of Revolutionaries, and Amerika's militia groups, and how democracies respond. Proto-fascism in Hungary is our warning.

China's surgical soft landing will slip control, like Fed tightening in 1929 and 2007, or Japan's squeeze in 1990. Once construction has run amok, bears will have their way.

Since the purpose of New Year predictions is to stick one's neck out, let me hazard that China will devalue the yuan in 2012. It will export yet more spare capacity into a deflationary world, until the West retaliates and starts to turn its back on globalization. Capital outflows will accelerate. The idea that China can rescue anybody will seem quaint.

The strong yen has already pushed Japan back into deflation, and fresh recession. Public debt has reached one quadrillion yen, as noted acidly by Tokyo's R&I rating agency when it stripped Japan of its AAA rating last month. That is $12.8 trillion, or Italy plus Spain times four.

There is a graveyard full of Gaijin commentators who wrote off Japan too soon. Will the dam break this year at last, with tax covering less than half of spending, public debt at 237% of GDP, ever fewer workers, and a state pension fund now selling government bonds? Perhaps. As R&I warns, Europe's woes have brought sovereign debt into very sharp focus.

Amerika will look resilient for a few months. The payroll tax deal has averted a fiscal shock, but that is all. Money growth (M3) has sputtered out, and velocity is falling.

Politics on Capitol Hill will restrain Ben Bernanke from launching QE3 until the Tea Party can see the eye-whites of deflation. Six-month PCE inflation was 2.9% in August, 2.4% in September, 1.6% in October, and 1.2% in November. Not there yet. Prepare for a Wall Street squall first.

Whether the scare of early 2012 turns seriously ugly depends on the nerve of policymakers. Shock absorbers are worn thin, but not exhausted.