For our last campaign, I made a big spreadsheet with all of our inventories. It tracked ammo and consumables, carry weight, and value. It also tracked how each character was doing compared to expected wealth by level, which had been starting to become an issue, as the GM wasn't paying close attention when generating loot and many rewards were really only useful to some characters buy not others. I even added wishlists for things we wanted to save up for or create.
Then I added a page for tracking spells known / prepared / used, which could populate any available spells and abilities on a shortlist. Not only did this help stop one player from basically forgetting that spells are limited, it also made the most complicated character I've ever played into viable option, as he had full access to 4 spell lists and several powers chosen from three different classes, plus two specializations (each of which granted two more abilities automatically and gave access to even more powers to choose from) all of which had to be adjustable on the fly, because he could respec it all on a daily basis.
Then came the quest tracker and NPC index. No more forgotten plotlines or missing NPCs.
Then the kingdom building page, because we had a kingdom to run and that gets complicated. And an additional page for each settlement.
Then there was the calendar, because we're not using some boring earth calendar, and the GM wasn't going to make one himself. He refused to figure out some fantasy calendar that he isn't familiar with, so he told me to change the names on the real calendar. So I renamed all the months... and all the numbers. All the numbers, with no overlap, meaning each month counted 1 to 30ish in a different way.. So whenever we checked the sheet it would remind us that it is currently Jantober Seconst, Apruary Firg, or Juch Firstandthefirious. Every time a new day rolled around he would read the date, die a little inside, and then we'd all laugh.
In a way, the inventory became as much a game as the game itself. Plus, I showed it to my boss and got a promotion. True story.
Inventory management can be fun if implemented well by the system. See Traveller. “We’ve got 3dT of cargo space left. The locals are paying crap for petrochemicals but they’re having a fire sale on marble. If we basically give away that benzene that no one’s bought in 3 months, we can fill up on marble that some architect will definitely snatch up at the next class A starport.”
If we want to take this seriously, just for fun, then we need to first consider what "put the last bag inside the first" means. Bags of holding are openings into extradimensional spaces, effectively portals. Theoretically, I don't think there's any problem with extradimensional spaces containing portals to each other in a looped manner. The problem comes with the physical act of placing one bag inside the last. In order to do so, you'd need to have a way to teleport into a known extradimensional space without using the opening. I don't think there's a way to do that in any edition of DnD or Pathfinder, but I could be wrong. If you can, however, then you could use exactly the same technique to retrieve any of the bags and therefore open the loop again.
Pshaw, D&D barely even has encumbrance rules. Gotta play GURPS where your movement and dodge get worse the more you're carrying, and bags of holding don't exist.
As someone playing a non-dwarf in Warhammer Fantasy Roleplay 2e, I very much enjoy the finagling of inventory encumbrance between my own character and something/one else, like the dwarf in the party, or the horse I RAW need to own in order to progress into the career that my character is best suited for.