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Watchcon's an intelligence/observation sort of thing; defcon is more directly related to actual clash of arms. The more severe the watchcon rating - that is to say, the lower the number - the more intense, upclose, and don't-overlooky observation will be.
In this case Watchcon 2 means that the US military and intelligence community are going over North Korea with something like a fine-toothed comb. Something similar happened in 1990 when Iraq was gearing up for its invasion of Kuwait; I'd assume both would involve a lot more air coverage, maybe more work with satellites, certainly more in trying to get a hold of communications and the like. Basically they're trying to figure out just what North Korea's up to, and trying harder than the usual.
Defcon is more explicitly a rating of how ready the military is to go to war. It's a similar sliding scale, with Defcon 5 being typical dull peacetime situation, 4 being still-routine precautions, down to 1 involving an actual outbreak of hostilities (or an utterly imminent one). US forces in Iraq would be on 1 in theory; US forces in Nebraska are usually on 4 or 5.
The US military as a whole going to Defcon 2 would be a huge, terrifying thing, since it would imply something was going on that the entire armed forces would need to be aimed at. September 11 took global US forces only to 3, and the Cuban Missile Crisis only took parts of the military - mainly the strategic arms - to 2. Partial 2s have happened a few other times, but they're very rare and only happen during situations that are probably tenser than what's going on in the Korean peninsula right now.
Anyway, what's going on is that the US went to Watchcon 2 around North Korea, because that barn door needs to be locked sooner or later, but someone reported that as the US going to Defcon 2. Thank goodness nothing's happened to require that.
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