My inner Geek begs to be unleashed by this post...so I will.
In computer terms...the brain has two types of memory.
Short term and long term.
When short term memory fills up it's much like when a disk needs to be defraggemented. The brain doesn't operate very well.
Buffer Overflow
When you sleep, particularly when you dream.
You short term memory is transferred to Long Term memory when you sleep.
The 'bleed over' from the process is perceived by your unconscious mind as ...a dream.
Humans excel at pattern recongniton. That's what we do. We see patterns everywhere, we generalize (but that's another story). We see patterns even if there are none.
That's what dreams are. Our unconscious minds try to find patterns in the bleed over from the process of transferring short term memory to long term.
IF "--the disk remains fragmented--" very bad things happen.
Sleep deprivation is the same as overloading the buffer and NOT defragmenting the disk
One sure, absolute, works every time way to drive someone INSANE is to keep them awake for...oh...about a week.
It destroys their mind...the disk is fragmented beyond repair.