I'm confused. If "growth rate is directly proportional to current capability", then why would you ever stop having 1.25% growth? You'd just be seeing 1.25% of an increasingly larger number.

You're right, I stated that incorrectly. In my example the growth rate and the capability were both increasing with the justification that an improvement in the ability to improve itself would lead to an increasing growth rate over time. For instance if each (u,d) pair of improvement and difficulty is ordered correctly (luckily?) it is likely that solving enough initial problems will decrease the difficulty of future improvements and lead to an increase in the growth rate. Instead of leading to diminishing returns as the low-hanging fruit is discovered, the low-hanging fruit will turn previously hard problems into low-hanging fruit.