Peggy sits on the stairs in her basement, near the dead bodies of Dodd's accomplices. Dodd, unconscious, is tied up. Peggy has a hallucination of a man asking whether she has fully actualized and quizzing her on the definition of "being." She comes to the conclusion that she has to just "be" the person she wants to be, instead of thinking it.
Ed finds Peggy in the basement, where she tries to explain her realization about being to him. Dodd, who has woken up, comments to Ed that Peggy has lost her mind and is seeing people who are not there. He tries to say that he was simply a concerned citizen who was walking past, that Peggy accosted. Ed tells Dodd that he knows he is a Gerhardt. Dodd, realizing the jig is up, insults Ed and Ed punches Dodd, rendering him again unconscious. Ed rounds Peggy up to skip town, taking Dodd along in the trunk of their car.
As Ed and a babbling Peggy drive away with Dodd in the trunk, Hank and Lou drive up to the house, just missing them. They find the dead bodies of Dodd's two accomplices. Lou surmises that the two men are Gerhardt men. Lou notices Hank is sitting down on the stairs, woozy, and calls a medic for him. Hank is carted off to the hospital, asking Lou not to tell Betsy so she doesn't worry about him.
As the ambulance and Lou separately drive away, Hanzee emerges from the shadows. He goes into the Blomquist basement and surveys the damage. Hanzee scopes out the rest of the house, attempting to ascertain where the Blomquists might have headed. He spots the reservation for the Southnik Hotel (from Constance) and rips it off the fridge.
Driving out of town, Ed comes up with the idea to hide out in his Uncle Grady's empty cabin in Canistota, South Dakota. Peggy continuously babbles in an upbeat manner, expressing her happiness that she and Ed are breaking free. She essentially ignores all of Ed's worrying. Ed is taken aback at her suggestion that they had to break free from their home, but brushes that off.
Peggy and Ed arrive at the cabin. They unload Dodd from the trunk, and Peggy cattle prods him again into submission when he tries to escape. They tie Dodd to a chair, and Ed inspects his wallet, checking Dodd's identity. Ed tells Peggy that he plans to go to a nearby convenience store to use their pay phone, so he can make the call about offering to trade Dodd. When Peggy asks what will happen if they refuse, Ed insinuates that he will kill and chop up Dodd.
Ed calls the Gerhardt estate, only to be rebuffed by Ricky, who takes a message. Ed spots a trooper and hangs up, leaving.
Dodd continuously tries to break free as Peggy calmly cooks food. Dodd at first tries to play the nice guy card, mentioning that he has four daughters. Peggy comments that he called her a whore. Dodd switches back to being threatening and Peggy retaliates by stabbing Dodd twice with one of her kitchen knives, intimidating Dodd into being more polite to her.
Peggy feeds Dodd beans (at first against his will) and rants about how she didn't even mean to kill Rye and that it was really Rye's fault for stepping into the road.
Ed comes home. Dodd tries to tell Ed that Peggy stabbed him and is crazy. Ed ignores him. He reports back to Peggy that the Gerhardt flunky he spoke with didn't want to negotiate for Dodd's return, and that they will not want to negotiate for Dodd if he is too cut up. They are both confused by this, and Peggy suggests that perhaps it is because the Gerhardts are busy with the war going on. Ed sits down to eat, softly telling Peggy that she has to stop stabbing Dodd.
Hanzee spots a plaque commemorating the killing of Sioux Indians, noting with distaste the vomit below the plaque. Hanzee enters the bar and asks for a water. He accuses the bartender of having spit in it, and asks for a tequila instead (and for it to be poured in front of him). He questions the bartender about whether he has seen a white couple. The bartender quickly reveals himself to be very racist against Native Americans, suggesting that Hanzee is un-American. Hanzee mentions that he did three tours in Vietnam, getting a Bronze Star and a Purple Heart.
Hanzee leaves, and is followed out by a group of three men who harass him for his Native American heritage. He shoots them in the leg. The bartender calls the cops. Hanzee enters the bar again, shooting the bartender dead. Two officers ride up and Hanzee pulls out an automatic weapon, killing the two officers. He drives off in search of Ed and Peggy.
Back at the cabin, Dodd insists he needs to urinate and Peggy tells Ed to help Dodd so he doesn't pee in his pants. Ed awkwardly helps Dodd, and then leaves to go make the call to the Gerhardts to once again attempt to negotiate for Dodd's release. Peggy remains behind at the cabin with Dodd.
In the hotel room, Constance awaits Peggy's arrival. She has set up romantic candles and put a bottle of Chablis on ice to set the mood. She hears a knock at the door and moves to answer it, assuming it is Peggy. Instead, she is surprised to open the door and find Hanzee.
Ed again goes to the convenience store and tries to call the Gerhardts. Their house is empty and he gets no answer. Ed goes into the store and spots Hamburger Helper. He grabs it and has a polite conversation of small-talk with the cashier. The cashier comments that it isn't the correct season for a vacation. The cashier gives him a deck of cards for free, for entertainment, and takes an extremely long time to check Ed out, to Ed's consternation.
Peggy attempts to get the TV to work, to no avail. She takes the phone into the bathroom and places a call to the Southnik Hotel. She speaks to Constance, who is being held hostage by Hanzee. Hanzee listens in on the call, as Constance attempts to act normal and gauge Peggy's whereabouts for Hanzee.
Peggy mentions her "vision" and newfound clarity to Constance. Constance attempts to convince Peggy to tell her where she is or to come meet her at the hotel. Peggy hesitates to tell Constance her address. Constance offers to drive over the seminar workbooks. Peggy refuses to give her location, saying that she'll talk to Constance once she and Ed are returned from hiding out, and hangs up. Constance tries to insist to Hanzee that she tried to get Peggy's location, but Hanzee threateningly puts his hand on her hair.
Peggy and Ed lie in bed that night. Peggy comments that Dodd is looking at them. Ed commands Dodd to stop looking at them, while Dodd remains obstinate and refuses. Finally, Ed puts a pillowcase over Dodd's head.
The next morning, Ed leaves again to make the Gerhardt call. Peggy watched "Operation Eagle's Nest," a fake Ronald Reagan movie. She becomes entirely engrossed in the movie. We watch as the scene unfolds in full focus:
The French hero nearly sacrifices himself to the enemies gunfire so that his love interest can escape. They are rescued by an American who shoots the Nazi threatening the French couple. The Nazi gets up and follows the heroes.
As Peggy is engaged by the movie, Dodd escapes. When she next looks up, he is gone and his restraints are on the floor.
Ed argues on the phone with Ricky at the Gerhardt estate once again. He sees mention of the Gerhardt gang war in the newspaper and tells Ricky that he'll just offer up Dodd to the other side, in that case. He calls the Pearl Hotel looking for Mike Milligan. He convinces the receptionist to connect hiim to Milligan's room by lying and saying that he found Milligan's wallet at his store.
Ed reaches Milligan and tells him that he has Dodd Gerhardt, if Milligan wants him. Milligan tells Ed that he does want Dodd, and asks what Ed wants in return. Ed tells Milligan that he has the Gerhardt family after him, and wants Milligan to get them to stop. Milligan easily agrees to this. Ed coordinates with Milligan, that they'll meet at the motel in Sioux Falls. Ed hangs up and heads back to the cabin, dropping the newspaper which has a picture of Hanzee on it with the caption that he is a "native" wanted in a manhunt.
Hanzee enters the convenience store and tries to gauge the cashier for information about the whereabouts of a heavyset redheaded man driving a blue Lincoln. The cashier tries to tell Hanzee to leave, but Hanzee calls him out on knowing the man Hanzee is looking for. The cashier admits that Ed told him that he was "going crazy down there at the lake." Hanzee leaves the cashier unharmed. Immediately after Hanzee leaves, the cashier spots the newspaper with Hanzee's mugshot and grabs the phone to call the authorities.
Ed returns to the cabin and finds it empty. He calls for Peggy. Dodd sneaks up behind him and strings him up in a noose. As Ed is slowly being strangled, Peggy comes to. She manages to disable Dodd by stabbing him throw the foot with a knife, pinning him down. She knocks Dodd out and saves Ed. As they are tying Dodd up, Hanzee arrives. Dodd insults Hanzee, demanding that he just kill Ed and Peggy. Hanzee shoots and kills Dodd instead.
Ed and Peggy are shocked. Hanzee requests that Peggy give him a professional haircut and sits down. Peggy picks up the scissors to start cutting Hanzee's hair. Hanzee, still holding the gun, warns Peggy against any "funny business." As Peggy is about to either cut his hair or stab him, through the window Ed spots Lou and Hank making their way to the cabin.
Hanzee notices, and shoots out the window at the two men. Peggy stabs Hanzee in an attempt to disarm him. Hanzee moves to shoot the Blomquists but is out of bullets. He escapes out the door just as Lou and Ed storm the cabin, guns blazing.