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Okay Joe and Sue don't pay back their loan.

Either Beth now has to borrow for her house or business at a higher rate of interest OR we deflate the value of the currency (by increasing the money supply) to make up for the loss on the balance sheet.

Congratulations your civilization just discovered run away inflation.

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The house is still there, it is repriced and sold.

The bank cannot lose money because money is a representation of all production and resources in the economy. (Edit: balance sheet is always zero)

There is no deflation because you are the bank and you can print money.

There isnt inflation because you can tax assets or reduce velocity of money (i.e. inflation) through transaction tax.

What marvelous central bank and government work together so perfectly as to have neither inflation nor deflation? Have you seen the central bank and government in the US? They’re both highly incompetent and ridiculed domestically and internationally.

Joe and Sue also don't pay back their loans to private banks, and those banks get bailed out.

Depends on the size of the bank. Obviously the government prints money when it needs to buy ideally it ain't just freely printing willy nilly every day.

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