I think anyone who could create software to do all that would be working in a more lucrative field than PC air-combat simulation.
It isn't a totally ridiculous idea, as far as producing multiple LODs goes - it wouldn't need to be done in real time, and in fact needn't be part of the game engine at all. Modelling the DM real-time to the level of detail described looks just impossible though. Maybe the hardware to do this will arrive someday, but I wouldn't hold your breath...