genuinely concerning blurring of reality and fiction

Mental illness, very much like what it pictured in the post.

GenAI has already made this worse. It's not essential to LLM technologies, virtually the whole industry makes their LLM's generation patterns so deferential that they worsen the reality-breaks of people that interact with them enough, very much in a "Folie à deux"-style (tho, there's no "deux" there).