Lyric discussion by Ciberratt 

Cover art for Pancho & Lefty lyrics by Townes Van Zandt

The song seems to me to be autobiographical... The 1st verse is the tip off...

 Living on the road my friend
 Was gonna keep you free and clean
 Now you wear your skin like iron
 Your breath's as hard as kerosene
 You weren't your mama's only boy
 But her favorite one it seems
 She began to cry when you said goodbye
 And sank into your dreams

Later he sings

 Lefty he can't sing the blues
 All night long like he used to

Which I'm pretty sure is self referential

And later still he sings

Lefty's livin' in a cheap hotel

Which is where he spent most of his time.

Who Pancho is I'm not 100% sure. Could be someone he was involved with professionally who screwed him over or it could be, as has been suggested by some, the other side of his manic depressive personality.

In this last case he is whole in the first verse but then splits into two distinct personalities (after being out on the road so long) for the rest of the song.

Perhaps he felt he'd sold himself out (of a better/easier life) by choosing the life of a wandering troubadour?