In Letter 7 of The Screwtape Letters by C.S. Lewis, what is the cruel dilemma about whether the demons should conceal their existence?

In Letter 7, Screwtape writes that the demon race is faced with a "cruel dilemma." Here is the dilemma: "When the humans disbelieve in our existence we lose all the pleasing results of direct terrorism and we make no magicians. On the other hand, when they believe in us, we cannot make them materialists and skeptics."
In this letter, Screwtape talks about what he calls "Materialist Magicians," a reference to those who believe in a vague spirituality but who disavow the existence of demons. While Screwtape relishes the idea of deceiving mankind about the existence of demons, he is irritated that doing so costs the demon race the inability to capitalize on and to take credit for acts of "direct terrorism."
Furthermore, when humans disbelieve in demons, the demon race cannot make more "magicians." These "magicians" are human beings who believe in spiritual forces but who refuse to accept the existence of either God or the Devil. In other words, "magicians" reject both traditional religion and secularism. Screwtape prefers people to believe in a vague, magical "Life Force" (a third alternative) so as to be unaware of the danger they're in: "I have great hopes that we shall learn in due time how to emotionalize and mythologize their science to such an extent that what is, in effect, a belief in us, (though not under that name) will creep in while the human mind remains closed to belief in the Enemy."
On the other hand, when humans believe in the existence of demons, they cannot be made "materialists and skeptics." This means that those who believe in the existence of demons are not so readily trapped in a materialist mindset and are more aware of the machinations of the demons.
To Screwtape, the solution to this dilemma is to get to a point where the people are divided into opposing factions. He relates this to the war effort: Screwtape doesn't care who becomes pacifists or patriots, as long as people forget all about God. He encourages Wormwood to work to create extremes, either from a right-wing or left-wing perspective. The only thing they must guard against is people practicing "extreme devotion to the Enemy" (God).

Let him begin by treating the Patriotism or the Pacifism as a part of his religion. Then let him, under the influence of partisan spirit, come to regard it as the most important part. Then quietly and gradually nurse him on to the stage at which the religion becomes merely part of the “cause,” in which Christianity is valued chiefly because of the excellent arguments it can produce in favor of the British war-effort or of Pacifism.

This is a difficult passage, but I hope that what I've written is helpful.