All loans could in theory be paid back, extinguishing all debt. If the loaners are not able or willing to pay back, the loans could be written off as a loss, same result in the aggregate.
Defaulting is not paying back, so that first sentence is incorrect. Due to interest on debit being higher overall than interest on credit, there is always more debit than credit in the system, and debit will always grow faster. If everyone would pay their debts or otherwise default and lose any collateral, the banks would end up with most of the world's property. That by itself shows the banks being parasites, since they never created anything of value themselves, they only moved and manipulated money, yet they'd own almost everything.
Exactly, there is an ownership shift problem in the current monetary system, it should be the one who own the assets get the ownership of both assets and issued money, but banks took ownership of the assets during the money creation process and this caused the biggest robbery in human history
For example, I'm government and I issue 100 billion dollar based on my asset (bond), I should have the ownership of both 100 billion dollar and the asset. However in today's system, if government issue 100 billion dollar based on their asset, the ownership of those bond will belong to FED, which is not owned by the government. So the banks get the ownership of large amount of assets by simply creating money
Similarly, a house manufacturer can issue 1 million dollar based on his asset (house), he should have the ownership of both 1 million dollar and the house. After he spent 1 million dollar, those dollar might come back to him to redeem the house, but until that, he still own the house. In today's system, bank took his house and give him 1 million dollar, and those 1 million dollar is created by the back of that house, this is equal to bank creating money out of nothing and buy his house
Under a gold standard, where money creation can only be backed by gold, banks can not do this, they must first get gold and then issue money, or to say, their money creation is limited by the amount of gold produced, so they can't steal at grand scale like today
