Why is it less offensive if we know it's fake?

I know that the Kracken is myth and I'm cool with seeing it on the screen. I know that the portrayal of the native Caribs is inaccurate and constructed and it leaves queasy and feeling implicated in its racism.

I do not think it's okay to throw stereotypes around for entertainment, even if everyone is supposed to know they're false. How do you think these images and misrepresentations are perpetuated in the first place?