Problem is, that's not what we've observed to happen as these models get better. In reality there is some metaphysical coarse-grained substrate of physics/semantics/whatever[1] which these models can apparently construct for themselves in pursuit of ~whatever~ goal they're after.
The initially stated position, and your position: "trying to hallucinate an entire world is a dead-end", is a sort of maximally-pessimistic 'the universe is maximally-irreducible' claim.
The truth is much much more complicated.