The correct version of the lyrics is 'diffused', though 'defused' could also make sense. And you're right that they can sound the same, even to the native speaker's ear. Unstressed syllables are weakened to either a schwa or a short 'i' sound, so there is often no difference between the sound 'di..' and 'de..' when unstressed.

Part two why it isn't and cannot be defused. "His mind is distracted and diffused" <defused does not work with distracted. "His thoughts are only of you"<- you equals Kathy in England "His thoughts are many miles away" <- they are not needing to be DE-fused "his thoughts are with you" <-- you is Kathy "When Kathy goes to sleep" "When she starts the day" <-- his thoughts are Distracted there and diffused. "He does not know why he wastes time writing songs he does not believe" <- he is distracted and diffused. "He is writing songs where the lyrics strain to rhyme" <- because he is distracted and diffused. "He doubts all he once held as true" "He stands alone with beliefs" "The only truth he knows is you" <-you is kathy. The last three lines of the song are a little more profound, and may be understood differently by different people. The song does not End with his mind being De-FUSED he is still in the same state of distraction and diffusion. LYRICS HERE https://www.youtube.com/watch?v=khfPACSsVqU

it is diffused, his thoughts are all over the place. Although defused may work grammatically. The song is not about a situation or conflict that needs defusing. Paul simon was/is a master of the English language and uses standard English for all his songs, no double meanings or slang etc. That's why his songs and others by people like him "stand the test of time" . Paul simon would never make that mistake. If he wrote "diffused" he meant diffused. The song is clearly about diffused thoughts. Defused grammatically has a "de -FUSED" = no longer <-- it leaves ambiguity for later translations and understanding of the lyrics. Paul Simon would never do that. Release a song with possibly ambiguous lyrics.

I think "diffused" is correct, meaning that his mind and thoughts are all over the place and not focused on one thing. To "defuse" means to make a situation less dangerous or less emotionally charged, which doesn't really make sense in this context.

I want to thank everyone for your help. I appreciated your answers