This TED talk by professor Franz Hörmann does a good job of explaining.
https://www.youtube.com/watch?v=88ksYFsleto
Simply put, when money is created by the bank for a loan, only the amount for the loan (the principal) is created and given out. The problem is that an extra fee (interest) is charged on top, but the money to pay that fee was never created.
So basically it is an impossible contract to fulfill on a macro scale. A negative sum game.
It's not a theory, it's armchair cynicism.
Some high growth startups are kind of like Ponzi schemes, in the sense that some investors know they won't ever get to the full valuation needed to justify the investment - but that someone down the line, after the IPO will be left 'holding the bag', but the economy itself is not a 'ponzi scheme'.
Can you recommend any references for a non-economist to learn about this theory?
Also, is this related to why financial markets are so obsessed with profit growth? I always wondered why being profitable wasn't a good enough indicator of success.