Kevin Kelly has a great piece in the new issue of Wired called "God Is the Machine." The idea is that our universe is both a computer and the output of that computation, and that the simulation is the reality.
Any large computer these days can emulate a computer of some other design. You have Dell computers running Amigas. The Amigas, could, if anyone wanted them to, run Commodores. There is no end to how many nested worlds can be built. So imagine what a universal computer might do. If you had a universally equivalent engine, you could pop it in anywhere, including inside the inside of something else. And if you had a universe-sized computer, it could run all kinds of recursive worlds; it could, for instance, simulate an entire galaxy.
If smaller worlds have smaller worlds running within them, however, there has to be a platform that runs the first among them. If the universe is a computer, where is it running? Fredkin says that all this work happens on the "Other." The Other, he says, could be another universe, another dimension, another something. It's just not in this universe, and so he doesn't care too much about it. In other words, he punts. David Deutsch has a different theory. "The universality of computation is the most profound thing in the universe," he says. Since computation is absolutely independent of the "hardware" it runs on, studying it can tell us nothing about the nature or existence of that platform. Deutsch concludes it does not exist: "The universe is not a program running somewhere else. It is a universal computer, and there is nothing outside of it."
