My mother in law is a master confabulator. She makes up stories out of whole cloth and absolutely believes them. They range from the mundane to the fantastic to the impossible. Some examples:

One year she was disappointed that we didn't come to spend Christmas Eve with her. She never called to make plans because she imagined we'd just come over because "that's what we always do." In reality--we have never spent xmas eve together-- ever.

She insists there was a ghost in her house which played pranks on her and-- in full view of two other people levitated a potted plant and threw it at her.

and her masterpiece-- blaming me for her husband's death (of cancer) because I asked him to come to his daughter's graduation ceremony. I don't even know what to do with this one.

The maddening thing is, these people absolutely believe these things. They will argue until they are blue and tell you that you're crazy. It's hard to even blame them in the end.