"'looping' of the optical ports in and out"
Simply means that the optical out transmits is a copy of what's received on optical in.
...as opposed to sending to the optical output something different, e.g. sound generated in the computer.

"I can't imagine why I'd send music FROM the computer to anything I own."
Lots of uses...
Analog - to listen through a decent sound system, or to monitor stuff if you are using the computer as part of a multitrack recording studio, e.g. you are listening on headphones to a instrumental accompaniment you've just recorded while recording a vocal or second instrumental part to go with it (or harmony vocal etc...)

Digital - er... to record on MD, perhaps?