Yes, this is a confusing setting for sure.
There has been so much confusion between three features in Discourse: 1) anonymous mode (what we’re talking about here), 2) anonymous users (who are not logged in), and (3) anonymizing of users (which admins do instead of deleting users in order to retaining their contributions to discussions).
We have already identified this issue and are going to at least partially address it by renaming anonymous mode. At the same time we’ll review and improve the related settings.