As a teacher, I loved when my first-grade students (5-7 years old) and (5th through 8th grade later in my teaching career) would use their imaginations to create stories. Unfortunately, I found most of my students had too tight a grip on reality to REALLY let themselves go in the fantasy department. Imagination is important in all areas of life. From books, movies and other entertainment to problem solving, imagination is key. "If you can dream it, you can do it." The best and brightest were always good with their imaginations because that's where inquiry becomes reality. Some examples of this are Walt Disney, Albert Einstein, the Wright Brothers, Alexander Graham Bell, Thomas Edison, Ben Franklin, and George Washington to name a few. Where would we be without their imaginations, dreams and/or inquiries?
I believe we must encourage each child's imagination to support their thinking skill development. I agree to distinguish between "lying" to avoid consequences for their actions versus "telling" imagined stories, but I also believe that most adults are intelligent enough to distinguish between the two and explain that difference.
An example of encouraging imagination in children came to me when one of my students told me of their younger sibling being picked on for having "an imaginary friend". I asked him why he though the friend didn't exist to which he replied "because no one else can see them". I offered that we can't see love or even wind, but we all accept those things as real. I continued to ask the child if he believed in anything like angels (guardian or otherwise). The student said yes. I asked if the student had "seen" one. He said no. I asked if it was possible that his younger sibling saw something that he didn't. My student reluctantly conceded that it was possible. I asked if it was possible that the sibling's "imaginary friend" could be an angel or something else that only the sibling saw. (Again, just POSSIBLE). My student again reluctantly conceded that it was possible. I replied that most of us had imaginary friends growing up that we eventually "grow out of" and that it was okay to believe that the invisible friend was "imaginary" but then again, maybe it was something "real". The most important part was to believe in the person who believes in the "imaginary friend" because they MAY see something that the rest of us don't. Unfortunately, we all lose sight of the "magic" we believed in growing up too quickly and tend to discount the "stories" of those who "see" things we don't. Maybe, just maybe, we don't know everything there is to know about the world and whether that friend is "real" or "imagined" makes no difference because they are real to the believer. (Adult example = How many of us believe in God while others try to discount or disprove His existence? Is it really any different?) Needless to say, after this discussion, my entire class kept looking for things they may not have noticed before and began not only discussing those things but writing about them. It became a GREAT platform for growth in literacy, public speaking (class presentations), and other life skills, not to mention it helped their observation skills which was very useful in science. (It also became food for thought on a number of levels in the teacher's lounge later in the day.)
All in all, it's simply a matter of how you "look" at things. ;O) I don't see the harm in "believing" and encouraging others to believe. You may feel differently. When asked if she believed in Santa Claus, a sixteen year old student replied that the way she sees it, if she believes and he does exist, she reaps the benefits (gifts). If she believes and he doesn't exist, she was at least a better person for an entire year which benefits her self, family, and community. She concluded by stating that she saw no harm in believing that Santa Claus existed and only good could come out of it, so it was a win-win situation. She then asked how much better off would the world be if EVERYONE "believed" in Santa Claus and other "people" who encourage us to be our best at all times. Needless to say, I believe this child was wise beyond her years as even her teacher had never really thought of it that way.
Anyway, that's my 15 cents and speech on a soapbox. The question now becomes do you see an opportunity of a teachable moment? As always (just like I tell my class), take what you can use and leave the rest.