>But it is impossible to completely simulate a system from inside that system--that's basic thermodynamics.
When you're talking about universe-scale simulations, I wouldn't be so confident in asserting what is or isn't possible.
Using our present level of scientific knowledge as if it somehow informs us as to the feasibility of universe simulation would be like paleolithic humans discussing the finer points of modern microprocessor architecture.
It's likely that time and space are both infinite, which would equate to infinite computational power. It's also possible that other universes may exist with physical laws completely alien to our own. I fail to see why our reality being a computer simulation is somehow far-fetched.