According to Stylus Magazine:

A bleak source of black comedy, “Time Out of Mind” is the best song on Gaucho, an uneven record that is nevertheless a favorite of many a writer here at Stylus. Apparently, “chasing the dragon” is forties slang for smoking heroin, and the narrator of this song lives his life “smacked into a trance,” to borrow a line from Pretzel Logic’s “Parker’s Band.” This somehow makes the song both funnier and more poignant, as Becker and Fagen leave the subject to enjoy his high, repeating to himself “It’s perfection and grace / It’s the smile on my face.” Let’s see Sears play that in an elevator!