Google tracks every search term you enter, every autocomplete suggestion you use, and then every result you click on in a search. This history is kept indefinitely. Any page on any OTHER site you visit that contains a banner ad served from their servers uses a stored session cookie to correlate that other site with your Google ID. In other words, you could be browse well outside Google's own site and services, and they'll still be able to learn exactly where you went, and they'll know it's you.
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The data is all there, behind Google's doors. Just the fact that it's there, providing agencies and organizations with a potential tool to bend - or horribly break - the law, is a problem in itself. Hooray for the cloud indeed.