It can log that you went somewhere that Google could not otherwise track you. And not just websites; mail, SSH, anything else. I'll wager a fair few people's attempts to avoid tracking for certain activities, clearing cookies, private mode, whatever, has been thwarted because they forgot they'd set this up.
Yes, that is correct. Google use every means possible to track you wherever you go. If that can't get your exact activity, they at least get something.
That's a big distinction though. I don't think Google has the obligation to make sure users are educated and informed. The deceptive practice of Facebook with Onavo is what people object to.
True this. I think it was on Ars Technica that I was downvoted to oblivion for raising the privacy implications of Google's DNS service.
There is a huge segment of the semi-tech literate crowd that feel wise for using it. I think it's because it's the only time they get to type in an IP address and it makes them feel l33t.