Magical Realism is an idea that is illuminating and extraordinary, but it can also be fractured. We all know, and love, works of Magical Realism. A few come to my mind including Paulo Coelho’s The Alchemist, Guillermo Del Toro’s Pan’s Labyrinth, Christopher Nolan’s The Prestige, or my personal favorite The Fountain. Some scholars argue that the notion of Magical Realism is rooted in the financial economies that have experienced disaster due to hyper-inflation or other erroneous monetary policies. One day a currency is riding high and stable, the next day the “paper” is worthless. For the citizen in these countries, money seems like magic stripped from its stability as a store of value. The value of paper just magically changes, so ephemeral and so quickly. It’s all magic set to the backdrop of real tragedy.

As an artform, Magical Realism invokes the dichotomy between fact and fiction that we all strive to understand better in our political realities. What is spin? What are lies or untruths told by politicians? How can we use new, creative ideas to better our society? Magical Realism can also penetrate our understanding of new technology as a speculative fiction. What newness seems almost magical?

While Magical Realism as an artform is beautiful, the societal context of Magical Realism can be disgusting. Magical Realism implies that overnight the basic functions of society have changed so drastically that they are no longer reliable. In the case of some Latin America this has included a monetary crisis or political instability. There is always hope, but that hope is rooted in the suffering of reality.

So, is the world of Magical Realism an escape or a heuristic to understand rapidly changing surroundings?

Of course, the same notion of Magical Realism can apply to a Country when it flourishes, when things feel too good to be true. While Magical Realism may have its ending in financial crises and collapses, it has roots in rapid growth and prosperity.

To the Magical Realist author, society cannot be explained by logic. The Magical Realist applies a fantasy, mythos, or other dramatic tale to explain fantastic events. The events are not explained by logic but are so unexplainable that logic does not apply.

We are seeing the warning signs of Magical Realism in the United States currently. As the Nation continues to launch Trillion Dollar bailout packages something occurs that defies logic. Unemployment and other ‘fundamental’ financial indicators warn of economic decline, while the stock market continues to grow in value. How does this happen when it defies all apparent logic?

Economic decline in the real economy or in the fundamentals of businesses should necessitate a corresponding decline in value in financial assets. Are stock traders and other financial services professionals misunderstanding our Nation’s collective balance sheet? Is the every day investor, noticing the collapse in the real economy, misunderstanding the complex nature of the abstract financial markets?

We know apparently that there is a simple enough explanation. Bailouts by their very nature create a bubble in asset prices. If these bubbles are too high, bailout-induced bubbles lead to hyperinflation. This is the crux of the psychological challenges associated with bailouts. The logical workings of our financial markets now must be explained magically. In other words, we can only explain asset prices by understanding an external influence of the market, that of central banks, and not the smooth logical markers of supply-demand equilibrium.

We often hear a cited drawback of bailouts as ‘moral hazard.’ A moral hazard is when consumers of central bank credit no longer feel that they must operate sustainable enterprises because they predict that their failures and poor decisions will be bailed out by Congress or The Federal Reserve System. During the Pandemic, Congress and The FED decided that businesses across the world should not be held responsible should they fail as a result. This is a debatable conclusion to reach because the free market would suggest that businesses that did fail simply did not adequately predict a market decline and protect their own financial footing.

As harsh as this may sound, Congress could have taken the stance that businesses should have predicted the crisis and should have either increased their savings to weather the associated economic storm or should have developed sound business strategies to become a stronger, or more efficient, business during the crisis. In the pre-bailout economy this type of reasoning does not seem harsh in the least. But once bailouts are culturally appropriate then the personal responsibility of the firm flies out the window.

The firm is no longer responsible for weathering financial crises, but it is the responsibility of Governments. This is a ‘moral hazard’ because some firms will change their operating habits accordingly. At best, firms will not become resilient to weather economic shocks and will become expectant of bailouts in the future. At worst, firms will unscrupulously demand Government bailouts during market downturns, even downturns imposed by healthy market corrections such as those imposed by ‘creative destruction.’

But there is an even worse societal outcome that is far more destruction that the resulting moral hazard caused by bailouts. Society experiences a collective “Magical Realism” where the operations of their economy and Government no longer function with apparent logic but require explanations that supersede information that is readily available or right in front of our faces. Many every day Americans will not understand why the stock market continues to rise when they see unemployment and bankruptcies occurring at alarming rates. But even if every day Americans do so, one still needs magical thinking to interpret reality, in this case an explicit trust in Central Bankers or Congress as Magicians who determine what level of bailouts are appropriate or required.

The outcomes of Magical thinking are disastrous, and we have already witnessed so many social movements rise up as Magical Realism becomes present in society. Magical Realism seeds political revolt because it implies a society that has acquiesced itself to logic and reason. Society accepts that Truth now is magical. In this environment truth, reason, and logic are not what wields power, but the ability to command ideology, the ability to use language as a weapon. The political revolutionaries that arise during times of Magical Realism are more akin to witches who use language to spell communities into following an ideological brand instead of the rightful revolutionary who uses language to help followers think for themselves. Bailouts are not only economically dangerous, but they are also politically dangerous for this reason.

That is not to say that the artform of Magical Realism is toxic. In fact, Magical Realist art is a great inoculation for a society gone off the rails by magical thinking. Magical Realist art goes far beyond simply providing an outlet for political restlessness. Magical Realist art helps identify apparent contradiction-points that could be manipulated by the witch’s spells.

In Pan’s Labyrinth, a movie that exemplifies the very best of Magical Realist art, the anecdote of human tragedies such as oppression and the death of innocence are explained as personal sacrifice. The main character’s eternal peace, the coming back together of fantasy and logic, are explained by justice, virtue, and principle in her story arc.

Each bailout will require a similar process to restore our faith and trust in economic and political logic and facts. In the meantime, we should be very skeptical of a political class, who may present themselves as logical and scholarly in their manner, but defy logic during crises. The actions of bailouts, unless grounded in logic that every day Americans can grasp, are one of the most dangerous forms of Magical Realism that political elites can enact in the 21st Century. They are quite literally no different than snake oil salesmen who ‘charge’ magical potions with unrecognizable benefits. So is the course of bailouts.