On Linux at least, hard links can't be made to directories, except for the magic . and .. links. So this only allows for a DAG.
Symbolic links can form a graph, and you can process them as needed using readlink etc. to traverse the graph, but they'll still be considered broken if they form a cycle.
Historically, it made deletion rather difficult with some problematic edge-cases. You could unlink a directory and create an orphan cycle that would never be deleted. Combine that with race conditions on a multi-user systems, plus the indeterminate cost of cycle-detection, and it turns out to be a rather complex problem to solve properly, and banning hard-links is a very simple way to keep the problem tractable, and result in fast, robust and reliable filesystem operations.
True, I missed that. I suppose with symlinks you have the reverse problem: you can point to deleted filenames and then have broken links. The cycle detection is still an issue though--it has indeterminate complexity and the graph can be modified as you are traversing it!
This is true, but just about everyone has a symlink cycle on their system at `/proc/self/root`, and for the most part nobody notices. Having a max recursion depth is usually more useful than actively trying to detect cycles.