Can someone explain in simple terms how a system that gives you points that allow you to trade those points for goods and services is not a debt against that system.
Somehow it has morphed in to a money making business - HOW??
In simple terms, it just follows the standard business practice of selling a product (FF points) for more than what they cost the business. When they first started, it was largely an internal affair; the airline "gave" you points for your patronage which you could eventually redeem for the airline's product (a seat on a flight), the cost of which to the airline (being the marginal cost) being well below the notional cost of the points being dolled out, and being well below the perceived value to the punter (being the usual purchase price).
As touched on by SOPS and Aussie Fo, Loyalty morphed when it expanded into program partnerships. The "paying customer" for airline Loyalty businesses these days is not the punter, it is the Program Partner (the likes of Coles, 7-Eleven, BP, credit card companies, etc). The Program Partners treat their outlay on purchasing FF points as marketing; it is simply just another expense line associated with getting punters to buy their products.
The more punters who are FF members, the more attractive the program is to Program Partners; the more Program Partners, the more attractive the program is to the punter.
For the airlines, Loyalty with a solid Program Partner base is a year round, flying or not, revenue stream with generally quite substantial margins due to the very low cost base. For QF, Loyalty routinely makes more than Jetstar off half the revenue.