What does Kim Jong Il really want? No one knows, of course—even the best intelligence on North Korea is sketchy—but it's a fair bet that the diminutive dictator wants to stay alive. Kim is said to be desperately worried. He is believed to move around a lot, traveling from palace to palace as Saddam Hussein once did. He disappears entirely from view for weeks. Kim even occasionally removes his pictures from buildings in Pyongyang, the capital city, in order to promote the idea that collective leadership is displacing his "Great Leader" cult. (He may be hoping to avoid a U.S. smart bomb with his name on it.) The one thing Kim has going for him is that most of the world fears that he has doomsday weapons. According to a visitor who met the dictator in Pyongyang recently, Kim said he could not give up his nuclear bombs because his million-man Army is hopelessly outmoded—leaving him at the mercy of the American military.

George W. Bush has given Kim ample reason to worry. The president has long insisted that North Korea scrap its nukes before Washington makes concrete offers of aid or other inducements. In his Inaugural speech on Jan. 20, Bush only seemed to harden his position, declaring that his No. 1 foreign-policy goal is "ending tyranny in our world" (presumably easier to do in North Korea if Kim surrenders his nuclear weapons). So it's no surprise, perhaps, that late last week the North Korean leadership sounded a bit spooked. Its Foreign Ministry announced for the first time that the North had obtained nuclear arms "for self-defense" and said it was pulling out of disarmament talks. The North's statement accused Washington of attempting to "topple [our] political system at any cost, threatening it with a nuclear stick."

The Bush administration played down Pyongyang's latest bluster. "Let's see what the North Koreans decide to do down the road," Condoleezza Rice remarked calmly, while making her first trip abroad as secretary of State. Rice noted hopefully that Pyongyang still aimed for a "denuclearized Korean Peninsula," and she said America's approach was to continue diplomacy: "The United States has no intention of attacking or invading North Korea."

But in truth, the administration has not put any new diplomatic solutions on the table since June—not least because some senior Bush hawks believe talking and cutting deals won't work. These hard-liners point to the Clinton era, when Kim agreed to freeze his nuclear program in exchange for large doses of aid and a civilian nuclear plant, but cheated on the sly. The question is, what will work?

Relations with both the remaining pair of nations in Bush's "Axis of Evil," Iran and North Korea, seemed worse than ever last week. (Iran's president warned that any U.S. attack would be met by "scorching hell.") Bush's current policy of harsh talk and no inducements seems to have only strengthened hard-liners in both North Korea and Iran. U.S. allies in Europe and Asia are growing balky and rebellious after years of off-and-on talks in which Washington has been a reluctant, even unwilling, partner.

Bush's new budget can only rattle everyone more. For some time the North Korean media have been making constant—even obsessive—references to Bush's development of tactical nukes aimed, according to the North, at "destroying [our] underground military facilities." Now the administration is asking for $18 million through 2007 to resume studying a new nuclear weapon: the "robust nuclear earth penetrator," or bunker buster. Meanwhile, word leaked that last November Congress quietly approved an administration request for $9 million to fund a study of another new nuclear weapon.

Yet Kim Jong Il may have less to fear than he imagines. Last week's public confrontations threw a harsh spotlight on a little-noted problem: America's own eroding capacity to respond to threats. The Army has been sapped by the Iraqi insurgency, recruiting is down and military hardware is battle-torn. Now U.S. officials are worried also about the increasingly decrepit state of America's own nuclear-weapons complex. The aging scientists who designed and maintained America's nuclear arsenal in the cold war will all be retiring within about five years. The number of elite-grade weapons designers has shrunk from as many as 100 to "a couple of dozen, no more," by one insider's estimate. "When one person retires, a large percentage of our knowledge goes out the door with him," says Los Alamos spokesman Jim Danneskiold.

Experts say scientists can't be properly trained without new weapons to design and produce. Everet Beckner, deputy head of the National Nuclear Security Administration, told NEWSWEEK that there is little choice but to develop a new nuclear warhead. "This is an area where people obviously think that you have the opportunity for revitalization of some of the skills and insights of the design community," he says. Some worry that American scientists already are losing a bit of their edge. "Pakistan is now producing more nuclear pits [the plutonium charge in the first stage of a fusion weapon] than the U.S. does," says Peter Pye of the House Armed Services Committee. "Do we really want to lose the technological lead which we have built up at such cost over the years?" That concern is fueling talk that even fresh weapons tests may be needed.

A few lawmakers think that some erosion of U.S. nuclear know-how is a risk worth taking if it will help diplomatic efforts to halt nuclear proliferation. The spread of nukes, they point out, is perhaps America's biggest nightmare in the age of terror. And as the propaganda from Pyongyang suggested, Washington will have a hard time insisting that other nations remain nuclear-free if it continues to insist on developing new warheads. " 'Do as I say, not as I do' is never a very compelling argument," observes one veteran nuclear-weapons designer.

The United States still has a vast edge in "smart" conventional weapons, which are far more useful for today's superpower. "We spend over $6.5 billion a year baby-sitting an arsenal of nuclear weapons," says David Hobson, a powerful Republican on the House Appropriations Committee. "That's a lot of money in the current environment, when we don't have enough money for armor for kids on the ground in Iraq ... And we spend less than $500 million a year helping to secure weapons-grade nuclear material overseas to make sure it is not stolen and smuggled into our country."

If a decision is taken to restart nuclear-weapons production, it will take years to actually deploy new bombs. Yet Washington may not have years to deal with the likes of Kim Jong Il. If both North Korea and Iran go nuclear, experts fear the final collapse of the 35-year-old nuclear Non-Proliferation Treaty, leading as many as 20 to 30 nations to seek nuclear weapons. Tehran is at least five years away from a weapon, according to intelligence analysts, so Pyongyang's next move could be the most telling sign of where the nuclear quandary will end up.

Kim has not tested a weapon yet. But there is increasing evidence that North Korea has played a central part in the global proliferation ring surrounding Pakistani nuclear scientist A. Q. Khan. The CIA and other U.S. intelligence agencies now believe North Korea was the source of 1.7 tons of uranium hexafluoride—a feeder stock for nuclear-bomb fuel—that was recovered from Libya last year after being flown into Tripoli on a Pakistani jet. Bush's warnings about that discovery in recent weeks may have spurred last week's announcement from Pyongyang, one U.S. official said.

So North Korea may be raising the stakes—and trying to force Bush to deal. "We cannot spend another four years as we did in the past four years," Pyongyang's statement said. Kim's frustration is probably boiling over, says Jonathan Pollack, a nuclear and Asian expert at the U.S. Naval War College. "They feel they have given the administration a decent interval. In the latter weeks of 2004 and early 2005, [the North Koreans] said we'll wait and see what comes out of the Inauguration and State of the Union. Now they've seen."

Yet the debate inside the administration could soon heat up again. Rice has asked Christopher Hill, the ambassador to South Korea who once negotiated a deal with Serb autocrat Slobodan Milosevic, to take over East Asia policy. Hill is widely viewed as a pragmatist who will urge Rice to put something on the table for Kim. (Washington has previously dangled a rough proposal for economic and other rewards; analysts say Pyongyang now wants more specifics.) Still, another official who is gaining power and influence in Washington is Elliott Abrams, the hawkish deputy national-security adviser who has quietly sought to funnel radios into North Korea in order to promote regime collapse through Voice of America broadcasts. One senior U.S. official admits that Bush's tacit policy for four years has been to hope for Kim's fall while dabbling in negotiations.

The president now knows that regime change has many risks—not just potential mini-quagmires like post-Saddam Iraq, but also having the wrong guy end up in power. "Pentagon officials had better be careful what they wish for," says Kim biographer Bradley Martin. "Although we may characterize the Dear Leader as a nasty piece of work, some of his military men are nastier still." At least one of them has argued for genocide.

Merely continuing to tread diplomatic water—to maintain the present position—may cost Washington leverage. Bush and Rice said the announcement from Pyongyang would be addressed, once again, in the "six-party" disarmament talks (that's China, Japan, South Korea and Russia, along with America and North Korea). But Bush is banking on allies that he may no longer have in this showdown—especially China and South Korea. Both countries fear regime collapse on their borders. They have increased their economic ties to Pyongyang, and want to soften their approach.

Given the right inducements, Kim Jong Il may be willing to bargain away or freeze his nuclear program. But at this point, he may need more than just a promise of survival. North Korea's economy is, at present, not suffering from famine, and Kim may be arranging for the succession of his Western-educated second son, Jong Chul, 24 (his elder son is considered a degenerate and even odder than Kim). But first Bush must embrace the idea that he actually needs to talk to Kim. The president's first-term approach toward both Iran and North Korea, U.S. officials say, was to avoid "legitimizing" them. He sought to treat them as Ronald Reagan did the Soviet Union, ostracizing them and pushing for a transition to democracy. But as one official notes, even Reagan eventually did business with the leader of the "Evil Empire."

With Christian Caryl and Hideko Takayama in Tokyo, B. J. Lee in Seoul, Sarah Schafer in Beijing and Mark Hosenball in Washington