That has nothing to do with Scratchpad, it's in the spec for HTML frames: "Infinite recursion is prevented. Any frame that attempts to assign as its SRC a URL used by any of its ancestors is treated as if it has no SRC URL at all (basically a blank frame)."
http://scratchpad.io/5mqq98D51P
Every change forces a reload on the iframe. I wonder if there's a way to prevent that.