Overall I'd say this is small potatoes in usability terms, because people are adaptable--they don't have a problem with some obtuse interface if it's universally standard practice. The worst usability issues are A) where the user doesn't know what to do or (worse) B) the outcome of some action is unexpected.
There's another reason that passwords should be masked, which is quite simply that that is what people expect. Imagine some website decided to follow Nielsen's advice and just use a regular text field. A user would not be expecting that at all and could enter their password during a conference presentation or something by accident.
Most people can't even remember a dang phone number if you give it to them face-to-face without several trials. What makes you think that idle shoulder surfing on public transport is an attack vector that has any sort of reasonable number of malignant users? There just aren't that many malignant skilled shoulder surfers out there, period.
Interesting debate, I would say 90% of the time that I type in a password shoulder surfing is not a risk because I am either at home or at work, with no one over my shoulder or in a position to see what I type. With so many passwords to remember about 10% of the time I become the pissed of user Bruce mentioned at the start.
Most of all I have to say the usual: There IS NO ONE ANSWER. Hire a designer, and if they have no convincing answer as to why, get users and do useful, scientific (not focus groups) research with your actual end users to find out what will really, really happen.
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Recently I took a few minutes to catalog 21 different ideas for non-script hand-lettered fonts that build on basic handwriting (rather than requiring a light box and penciling in advance and all that fancy lettering craziness)
These fonts are perfect for sketchnotes and bullet journals because they build on your existing handwriting. One element to successful sketchnotes- and to bullet journals that don’t take hours- is the ability to move quickly to keep up with your thoughts (journals) or someone else’s thoughts (sketchnotes in class, lectures, etc). Since these build upon basic handwriting- you can add your headers and titles to your page in normal- or slightly modified- handwriting, then return to it later when the speaker is telling a story or you’re waiting for journaling inspiration to strike and thicken lines, add serifs, or otherwise modify your handwriting to become eyecatching and beautiful fonts.
The cost is accuracy. When users don't get visual feedback from what they're typing, they're more prone to make mistakes. This is especially true with character strings that have non-standard characters and capitalization. This has several ancillary costs:
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