A lot will depend on the individual. If someone becomes very distressed on being told that their relative is dead, it is kinder to tell a fib that will keep them happy. Otherwise they will only be upset over and over again. And you have to wonder, for what? If short term memory is already very bad, it is unlikely that the truth will eventually 'sink in'.
If someone can accept the truth calmly, there is no dilemma. The trouble is that many dementia sufferers cannot.
Whilst I agree, one of the difficulties I've found is that mum's understanding can change from moment to moment. I've tried to be honest with her and given her a diagram of a family tree showing dates of birth and dates of death. This worked for a long time but I've noticed in recent days the date of death isn't really registering with her. However, if I try to come up with a "love lie" she will remember that and tell me I'm lying! Today and the last couple of days have been particularly difficult as mum is asking where my dad is. He died 16 years ago and she has acknowledged that he's dead but in the same breath commented on how odd it was that he went out earlier and didn't say goodbye! I now realise that maybe we've taken another step down that slope and she doesn't understand the words I or for that matter she is using.