Microblog Memes

Apparently you aren't alone in this interpretation: some critics compared the film to the 'An Occurrence at Owl Creek Bridge' story. Lynch himself described it as a 'psychogenic fugue'.

However, I prefer a more literal, though not more realistic, interpretation: that the events happened approximately as they're shown. This is in large part because best surrealism, in my opinion, presents a world that lives by its own rules, which may or may not resemble our reality close enough. This is how things are with J.G. Ballard, David Cronenberg, Murakami, and Kobo Abe to some extent; and Piotr Kamler to a lesser extent but in the other direction. And I also consider the 'it was all a dream' trick rather cheap (even though it works occasionally).

With this approach, the Creepy Dude would be an outside intrusion, similar to the evil from the Black Lodge in original 'Twin Peaks'. He puts Lone Starr into the Möbius time loop and leads him to kill a guy, of whom Starr wouldn't even have heard otherwise.

Lynch, in his typical manner, didn't discount this hypothesis either:

When asked by an interviewer in 1997 whether Pullman's character is "trapped in [a] time loop, doomed to repeat his murders and mistakes forever and ever", Lynch replied, "Well, maybe not forever and ever, but you can see how it would be a struggle. Yeah, that's it". He assented to a comparison with the Buddhist conception of reincarnation, elaborating that "it's a fragment of the story. It's not so much a circle as like a spiral that comes around, the next loop a little bit higher than the one that precedes it".

It would also be somewhat supported by the behavior of policemen and the mechanic guy's parents, who are outside Lone Starr's immediate experience in the mechanic guy's timeline, but get to live through the events.