@mitu Thanks for all your help and effort. I fixed it by checking a bunch of retroarch.cfg's. The one in 'configs/arcade' was at fault.

Makes sense, as I only use the arcade folder on my cab.

@capninja You're now dropped to a shell where you can execute commands as root. The # is the command line shell prompt. The usb keyboard problem could be because the USB drivers are not initialized in safe-mode.
I think that the safest option is to re-install. There's too much fiddling with the CLI and it will be safer. Even if you managed to recover the sudo functionality, there's a high chance something else is broken and normal operations would not work.