Okay, the error exists on my freshly installed demo site too.
When I select "Friends only" for the "Photo Album" then no photo I posted on the newsfeed shows up. Not for myself and not for any of my friends. The photo shows up on my dashboard newsfeed though, but only there. When I change the privacy settings to "everybody" everything shows up again.
This doesn't apply for the photos only. If you're a member of a group for example, and select "friends only" for "view my groups", even I can't see myself as a member of the group.