This means that if you try to connect to 127.0.0.1, you are immediately looped back to your own machine. If you telnet, ftp, etc... to 127.0.0.1, you are connected to your own machine.
In other words, 127.0.0.1 is you.
For example, if your system was named "hostname", and you attempted to telnet to 127.0.0.1, you would see:
# telnet 127.0.0.1
Connected to hostname
Escape character is '^]'.
Another name for 127.0.0.1 is localhost.
Although 127.0.0.1 is the most commonly utilized address for localhost, any IP address in the 127.*.*.* range should also function in the same manner.