Maybe Novalis is right, maybe that's what a fairy tale should be, but not every fairy tale really has that dreamlike quality about it (See my previous post, What is a "fairy tale"?). Most of them have a magical quality (what Novalis calls the "spirit world") as part of the fabric of the universe in which the tale takes place. But they are not uniformly "crowded" with a dreamlike panorama of lawless, magical beings.
What I find helpful in this quote is the reminder that "all of nature must be wonderfully mixed with all of the spirit world." In fairy tales, at least the traditional European kind Novalis has in mind, the world isn't neatly divided between "nature" and "super-nature," as if spiritual things are separate from the sober world in which laws of nature hold infallible sway. The purest kinds of fairy tales have a magic pervading them, not only because the reader is supposed to "suspend belief" in the normal laws of things, but because the world of the storyteller also harbors this element of wonder. Think deep woods--vast, unexplored woods with lonely cottages--and underground places and caves, rivers, mountain tunnels. While the natural world has this element of mystery, so do things that take place within it. You never know, crossing a great forest, what sorts of being you'll meet, and what kinds of incredible powers they may have.
For us now, Novalis reminds us that to appreciate the fairy tale, we must recover this innate wonder of the world, withdrawing the probing eye of omniscient science, with its "laws," and return to a sense of lawlessness, anarchy in things natural. Spirit must invade nature, re-infusing it with wonder.