There's a thread over on Ravelry asking whether cheap yarn detracts from the knitting. Why on earth would it?
I'm almost done with the Diamonds and Pearls Shawl, knit with the unravelled arms of a 49 cent cotton thrift store sweater. I love the color, the drape, the wonderful squooshiness of it...
This is yarn I would've bought in actual skeins.
And it's not the only time I've done this. Ester started life as a couple of sweater sleeves from the same thrift store. The felted firefighter hat was ugly blue auction wool that took a swim in some red Kool Aid.
I've had a disaster or two, but I've also had problems with LYS yarn. I've got more patience with the cheap stuff, just because I know that when I'm using it I'm taking my knitting into my own hands.