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CCC comments on Proofs, Implications, and Models - Less Wrong
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Note that a proper simulation in step (2) would include a number of simulations of simulations, and each of those would include a number of simulations of simulations of simulations. It's not merely the number of simulations that the base-reality does that's important; it's also the number of layers of simulation within that.
For example, with only three layers of simulation, if each humanity (simulated or not) attempts to simulate its own past just 100 times, then that will result in 10^6 third-layer simulations (1010100 simulations altogether).
The problem with recursive simulations is that the amount of available computronium decreases exponentially with level.