We know that LLMs build complex internal representations of language, logic, and concepts rather than just shallow word-counting.
If you deny that then you probably have an elementary understanding of how they work. Not even Chomsky denies that. The real argument imo is whether those internal representations constitute an actual "understanding" of the world or just flatten out to something much less interesting.
Actualy most statistical models can "hallucinate", specifically those that are capable of interpolation.
I have witnessed this for example in Gaussian Processes. In my own scientific work.