The term you are searching for is confabulating.
It's very possible the way we train current models will turn out to place fundamental limits on the abilities the models will have, but that will not be because the models act as associative memories.
1. autocompletion or
2. next token prediction and
3. (reverse) diffusion
We know that LLMs tend not to be good at math. Some people will say that the fact that an LLM cannot sum two numbers demonstrates they cannot generalise. Yet others would say the way LLMs calculate sums is generalisation because it mirrors our own process of addition which works mostly by memorisation and a lot of double checking.
My perspective is that the "thinking" that LLMs do is a lot closer to the kind that humans do which is to say a lot of pattern matching but with no fundamentally precise logic underlying it. If LLMs are flawed in some way then humans are also flawed in the same way.
Not really generalizing, not memorizing, maybe approximating ?