I understand that it's a circular limitation, but it is what it is. I know all about logical fallacies, but they don't necessarily apply to creating rules in an RPG. Just read the rules. You can dislike them, or you can dislike the theoretical extremes that they open up, but that doesn't change what they say. Initiate Grade is limited by Magic, Magic may increase as Initiate Grade goes up, and the end result is if you've got an unlimited supply of karma and time for training -- yeah -- you've got an awful lot of room for growth. That's just the end result, though. The initial result is that it requires a lot of karma to increase in raw potency as a spellcaster, because you've got to initiate and you've got to separately increase your Magic attribute (and, in a fashion, albeit a circular one, your ability to initiate is limited by your magic, which is limited by your ability to initiate). The end result is a ton of karma flying around to only make your character better at one thing, instead of rounding them out as a character...but the key is that the two karma expenditures are separate from each other, you don't get the free magic point with initiation, any more. That's a key difference between editions that quite a few players and GMs, in my experience, forget (and thus imbalance things pretty quickly).
I could understand a house rule where a GM wanted to cap Magic at 12 (and Initiation at 6, as such), because -- and I'll admit I've said so for a long time, and will continue gripin' despite being a freelancer now -- I hate that most folks have a hard cap on how good they can get, and mages don't. I don't see it mattering in most campaigns and with most characters, because no one's likely to ever get the unlimited karma, resources, training time, etc, required to really exploit it, but on principle I dislike having a cap on most attributes and abilities, and not on Magic (and Magic alone). In theory, I might dislike it about Technomancers, too, but I don't remember if their mumbo-jumbo is capped or not (because I've yet to run into one in a game). So I'd be fine with a house rule of limiting Initiation Grade to your natural Magic attribute (IE, 6)...but it would be just that, a house rule.
While it's not directly related to this rules issue, you're absolutely correct in your logical extrapolation of what IE's should be capable of, albeit it's an extrapolation based on the notions that they use magic the same way characters schooled solely in The Sixth World do (and they don't, but it's a reasonable model to use, regardless). This is precisely why, traditionally speaking, you don't see stats for Immortal Elves -- whether magical or otherwise, anything created with near-infinite levels of karma and resources is going to be nasty, of course. That's part of why they don't show up as the bad guys of every adventure, just like the players shouldn't be going toe-to-toe with Lofwyr real often, or something.
On an IE note, I have to ask, but why do you think the same doesn't apply to Horrors, Great Dragons, and other threats with lots and lots of time to earn and invest lots and lots of karma? When one remembers that most Great Dragons are older than most Immortal Elves, why is it you seem to think IE's can smack them around with impunity when, generally speaking, anything an IE can do, a GD can probably do (better)?