Lyric discussion by jlk7e 

I think these lines make it pretty clear the relationship between Pancho and Lefty:

The day they laid poor Pancho low, Lefty split for Ohio. Where he got the bread to go, There ain't nobody knows.

Lefty sold Pancho out to the Federales, and is now guilty about it.

That part is obvious to us all. What is not clear is what P&L have to do with the person--sounding schizophrenic--who is sinking into the dream. Why is he dreaming of this archetypal Western story? Is he at last losing contact with reality entirely, as his mother weeps to see him slip into psychosis?

It may be obvious to you and me. I'm less certain it's obvious to everyone, given many of the earlier comments expressing confusion about what's going on.

The opening part of the song is indeed the most difficult to parse.

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