I don't know why you keep bringing up classical mechanics; it's not somehow above reproach and I don't know anything about interpretation of classical theories or probability.So inner observer has collapse, outer observer has uncollapsed with device-system correlation. There isn't any real problem here that I can see. What's the contradiction?
The contradiction is that after I measure something I should believe according to collapse that the world is actually in that state. While according to unitary evolution I know the world can not evolve from an unsure state to just one of them. You can't just say it's my knowledge, it doesn't matter that it's inconsistent. Or at least, you aren't going to convince me of anything with that argument. Because what I care about is having a consistent model of reality and the only model of reality I have is based on what I know.
I think my position should be clear by now.