We are, perhaps, used to thinking of Fairy Tales as more light-hearted or shallow, intended for children. Andersen's Thumbellina or the Fables of Aesop. But if you read a loyal translation of the Brothers Grimm, you realize just how 'adult' some of these folktales can be. Think of the real violence of the Woodsman bringing Snow White's heart back to the queen in a box. And some of the Tales of the Arabian Nights are out-and-out, deliberate pornography. Certainly what Tolkien was referring to was the 'realm of Faerie' as was mentioned in your quote, the realm of dreams, perhaps, and the psychology of the soul. It is the world of Jung and Wagner, of Poe and Cuchulain. It's entry hides under the bed or in the closet and, most importantly, inside us all. Welcome to The Twilight Zone. It is all Faerie, and in that sense, yes, all of Arda is a Fairy Tale, for it lies within each of us.
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Yet all the while I sit and think of times there were before,
I listen for returning feet and voices at the door.
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