Yes, that's a good example of why not to use S3 as a simple backup destination. However software like Jungle Disk on running on top of S3 adds versioning and deleted file retention to make it act like a real backup system.
Having a local backup is great too, but that won't protect you from fire, flood, or theft in many cases.
I wasn't talking about zipping up your files on a CD and putting them in a draw. There are companies like IronMountain, which give you off-site physical storage.
I am sure the deletion protection Jungle Disk provides is good but what if somebody internally deletes a S3 file or directory of files they are gone for ever. This isn't an S3 problem just a issue with the strategy.
Someone at Iron Mountain or Fedex could lose your backups too (accidentally or maliciously). Neither is too likely, nor is someone internally deleting data at S3.
That said, if you have data you can't ever take a chance to lose, don't store it in only one place ever - not just on S3, not just on a USB drive, not just in off-site physical storage. Keep at least two copies, maybe more.
One of the things we're working on is allowing you to backup to multiple cloud providers - so even in the unlikely event of a catastrophic cloud failure you'd have other copies available.
Having a local backup is great too, but that won't protect you from fire, flood, or theft in many cases.