Very interesting concept.

My answer is that Ripple is completely complementary to bitcoin. Ripple is *not* a currency; it is really just a sort of decentralized ledger that tracks debts between pairs of individuals. Ripple does not create fungible tokens that can be shifted trivially from one person to another. It could be complementary if a lot of people used Ripple to track bitcoin debts.

This is purely an accounting mechanism which makes it easier to track debt obligations than a Lending forum post; no need for everyone to post their lists of delinquent loans. Instead, if someone asks you for a loan, you could look at their ripple loan history. If they already have 500BTC in debt owed to 100 different individuals, then you would know they are either in over their head or are dishonest.

While you could argue that ripple works like bank notes, the difference is that there is no bank or central bank to make all debts equivalent. Example:

1. Bob asks John for a 10BTC loan.
2. Bob could send a 10btc "note" to John through Ripple while John sends Bob 10btc through the block chain.
3. John wants to buy a flashlight from ABC for 5btc. ABC accepts ripple notes *or* btc. He could either:
  a) Send 5btc to ABC. Now he is out 15btc, assuming he has the cash.
  b) Send 5btc ripple note to ABC, since he already has 10btc in notes from Bob. This puts more risk on ABC, who has to figure out if John's IOU is nearly as valuable as btc cash itself.
4. Bob pays back 10btc to John, then John sends the 10btc "note" back to Bob, thus zeroing their account with each other.
5. Now Bob has the cash to pay ABC when needed. However, if ABC really trusts Bob, they might treat his debt as good-as-cash. Thus, they might leverage this debt for their own transactions, and so the debt could get passed around to yet other individuals.

In theory, if you had a large number of lenders and borrowers with a high degree of trust, then you could have have people lending to dozens of counterparties and rarely demanding actual cash (btc). Then ripple notes for btc would be equivalent to USD loans, or even dollars themselves, which is debt owed by the government. It could be cheaper or more convenient to just trade debts rather than swapping raw bitcoins, and ripple would presumably allow you to easily sum up all your notes to know if you are a net borrower or lender.

While ripple might eventually be a great alternative to bank loans, it is still a debt system. Any debt system could collapse when there is a "run on the bank." With ripple, a run on the bank would happen when everyone decided they wanted to call in all their debts from a large borrower. Only then would you know if there was actually enough BTC currency to back the debt. Chances are the answer would be no; debt systems lend themselves to fractional reserves.

I believe Shakespeare said, "Neither a lender nor a borrower be." It seems that the spirit of bitcoin is to create an inflation-resistant currency and to shun debt-backed money systems which could fail. Decentralized debt systems could fail just like centralized ones, though the risk is more distributed. Ripple could be useful for digital distributed debt tracking, but it would not hurt bitcoin anymore than a collapsed bank would hurt the value of gold.