I think you’re being way too literal. Of course it’s not really a “hallucination”, but such is the way language evolves. It probably started as a colorful description that caught on because it is mildly amusing. That doesn’t mean anyone really thought the AI was literally hallucinating. I think the term captures a sense in which the models cannot distinguish between real and unreal “pictures “ of reality, but in this sense it’s a metaphor, not a diagnosis of a psychopathology.