I'm give or take about "godmode" myself. When I used to play Neverwinter Nights, godmode was the only way I'd play, because I was playing that game to experience the storyline in all the player-made modules and dying kept getting in the way. However in a game like Torchlight, where story is a distant backseat to the action, godmode is the last thing I would ever do, for exactly the reason that it would get
very boring
very fast. In a game based around challenge, removing the challenge removes the reason to play.
I say, if you're competing against someone else, then everything should be kept entirely fair; one party should not have unearned advantages over another. But if it's just you, then play the way you like it. If you want to punch a mob in Atlas Park so hard he lands in Peregrine Island, so be it. I've played games that way and it
is fun. Except, as you said Tenzhi, I'd limit it to one or two characters, just for those "pure over-the-top fun" runs