George, I would like to add some additional comments. Your question has clearly bothered me, so I have done some homework to clarify this problem. In CCWAA one can find numerous references to the concept of psychosis, although Adler is using an older terminology which may partly sound somewhat strange to us. In Vol. 3, Ch. XIII On the Theory of Hallucination (1912), there is a discussion on this in pages 90 - 91. I do not quote the italicized paragraph beginning at the end of p. 90 because it is rather long. However, the end of the process leading to psychosis is "... in this condition of isolated human beings struggling for prestige, their ties having come undone, that the soul stumbles along the path of those lost to the community, the unreal world, and builds for itself a second world in which hallucination (read: psychosis) has validity because logic no longer matters so much."
There is another paper in Vol. 3, Ch. VII "The Life-Lie and Responsibility in Neurosis and Psychosis" (1914). "In the case of some psychotics, but also in neurotics, belligerence as well as accusations are not directed at a single person but at many, at times at all of humankind, at bisexuality, or at the order of the world. This condition is particularly acute in cases of paranoia. The total rejection of the world along with its condemnation is expressed in dementia praecox (read:schitzophrenia)."
Somewhere Adler says that gradiose ideas and compensatory and extreme feelings of superiority are always typical for psychotic persons. - When reading Adler's analyses, one understands why he thinks the limits between normal and abnormal are never absolute, only relative and flexible. So are the borders between neurosis and psychosis.