> Why are they faking the resolution?
Because bitmap-based applications (which is all of them) designed for 110 DPI are unusable at 220 dpi, you can barely click the buttons.
> I hope they are not rescaling stuff like photoshop to something other than actual screen res
From the keynote, I would guess they are unless the application "opts in" to HiDPI support, as with iOS. HiDPI applications would be rendered in "true resolution" (2880x1800), non-HiDPI ones are automatically scaled to the specified global setting (for non-native controls, native controls probably use native rendering in all cases)
> I have read this sentence three times and it still makes no sense unless the word 'resolution' has been completely mauled by marketing idiots.
It scales bitmaps, but text is rendered at native resolution (or so I'd guess), so the text and "native" UI elements are going to be extremely crisp, because they'll be rendered with 4 times the usual amounts of pixels for the same physical size.