@Sageous - I'm not aiming to create an argument, but I'm open to a nice discussion/debate.

In my opinion, I think your looking at this a little too literally, you're not allowing yourself to think of this in the correct fashion. Since one is dreaming while this is occurring, I think it's safe to say that there is really no limits as to what can happen, dreaming within your dream, being one of them. I'd like to add that what's happening is that one finds themself dreaming a dream, where they dream a dream within that dream. So, you are correct, yes, but also wrong.

Firstly, I'd like to point out that this is my opinion/theory, none of this has been dis/proven, so it's all equally invalid and valid.

You are right that this is only a single dream, and it really only can be that. However, Who's to say that within this dream, you cannot create a dream within it? You are then dreaming of a dream. Which is really not far fetched.. You can think about thinking about a thought, can you not? It's all being encased by thinking, yes. However, you can go deeper then a singular thought. Just as with dreaming, you can go deeper then a singular dream. Your dream simply encases another dream (The second dream).

Just as with reality, when we dream, reality is still in existence. With dreaming, once you dream about dreaming another dream within your initial dream, the initial dream is not lost. For if it was, your second dream would be lost as well, considering it was only going through that initial dream that enabled you to reach the second.

Furthermore, I believe that had it not been for your opposition of this idea, I would not have not taken the time to map out what could be happening. Your note on cognitive-dissonance being an issue must have been a factor in the dream when not knowing what was going on/not believing it to be true. Thus, diminishing the lucidity. If you still oppose the concept, please, tell me why in detail. Because you were not wrong, but not entirely right as well. I've drawn up a little sketch to make it easier to comprehend the concept as well, if anyone, including yourself would like to see.