The price that is to pay
I am in two minds about Google's data grab. On the one hand, it does seem frightening that some anonymous bods at Google know me and my interests as well as, if not better than, my closest personal friends. From tracking my site activities as well as my YouTube visits, Google know all about my programming and graphics design interests, what languages I program in, what 3D modelling and image processing software I use, what my political leanings are, and even what my sexual fetishes are. That, on its face, is scary.
That information could be used to build a psych profile on me that could easily be used to exploit my weaknesses (which is almost certainly the intent behind "targeted advertising") or frame or blackmail me, among other things. The targeted advertsing bit concerns me the most: the advertising industry has spent decades working out ways of bypassing people's conscious decision-making processes to trigger that all-important emotional response that leads to the impulse buy. How much more effective will these mind-bending scumbags be if they can access a detailed individual psych profile they can use to trip me up at every turn? My self-defensive response of course has been to adopt an immitigable hostility to all advertising, no matter how appealing, refusing to buy any product promoted at me in case the advert is trying to exploit my subconscious, and doing my own research when I'm actually in the market to buy something. AdBlock and NoScript are a great asset in this regard.
On the other hand, the retention of data Google is famous for has served me well more than once. I've lost count of the number of times I've wanted to return to a site I visited months ago but forgot to bookmark; just go to my iGoogle search history and look it up. That ability alone has allowed me to win many "I saw it on the internet" type arguments with friends and colleagues when they offer the stock response "OK then, show us the site!" Not to mention the ability to go back and see what I searched for on a specific date 3 or 4 years ago, long after I'd forgotten. A trip down your personal Google memory lane can be a very enlightening experience, as it shows you just how much of your life you DON'T remember.
Like all things, the service comes at a price, however free it may seem. It is important to remember that you are just one of hundreds of millions of Google users and the likelihood of anyone taking a personal interest in your Google activities is slim - unless your search history contains a lot of stuff like "loli", "pre-teen", "schoolgirls" and such; then you'd have a problem! The greatest danger facing most of us from all this is the psych-exploitative advertising, as mentioned above, and that can be mitigated with a well-placed ad blocker. In the end, it comes down to balancing how much use you have for the service against how much you want the service provider to know about you.