I can confirm that it's reproducible. The exact same thing happened to me. Difference was that I got out of the cycle.
Edit: Nope nevermind I see what you mean.
I assume you can probably get out of it if you pay off Death the same number of times the City Guard looped at the start. For me that was a lot of times, though, so I didn't have much hope of getting out of it.
Yeah i just gave up on that run....
