Golly, this thread moves fast. I'm nearly at the point of thinking Ken's not reachable, but what the hell--I have a glass of Talisker's at my elbow and I'm not ready for bed yet. Ken, do you really want an answer? Cuz this is my best shot at giving you one.
Part of the problem is nobody can speak for "Dan's people", not even Dan. We can all speak only for ourselves, and we're all someplace slightly different. It's the low-quality Kool-Aid Dan uses.
However, having drunk the Kool-Aid to some degree, here are my thoughts on the issues you've raised. Mine only, in fact I know some other IP guys disagree with some of this:
Cooperative practice: All martial training is cooperative to some degree. When I took up boxing, the first time I put the gloves on with my trainer, you know what? He didn't knock my block off.
The problem people see is that so much of Aikido training is so cooperative that not only does your technique not have to work, but you get no feedback that it's not working. As a result the training becomes entirely ineffective.
It's also a complete misunderstanding of O-Sensei's intent, as I understand it. He forbade competition not because we're all supposed to be too full of sweetness and light to compete, but because as soon as you impose rules you have a sport, not a martial art. His art was supposed to be too fierce for competition, not too gentle.
Many modern Aikido dojos have gotten so much into the "art of peace" thing, they've lost sight of this fact. "Katsujinken" is first and foremost a sword--once you've understood that, then it can give life. Cooperative practice is fine to learn the move, but then it has to get more and more realistic if you're going to advance in your technique, until finally you're honestly trying to clobber the guy while staying centered and able to deliver a follow-up blow, and they're honestly throwing you, and you take the fall because it's really the best way out of an unsafe situation.
O-Sensei's spirituality: Of course O-Sensei was both spiritual and religious, and of course he talked of Aikido as a way to bring peace. But understand his language here in terms of his context as a Japanese budo man born at the beginning of the last century.
When O-Sensei spoke of "not trying to win" (referencing the 1957 interview, and thanks for posting it, it's a while since I last read it and it merits re-reading) he didn't mean that winning didn't matter. When he talked of budo being love, he didn't mean to give up to your opponent. He was perfectly capable of talking peace and love and then breaking his uke's arm on the mat through his vigorous technique--just as a Zen master can talk about compassion and detachment one moment and be shouting at his student over their stupidity the next.
In O-Sensei's case, he was using very traditional budo language to talk about the attitude of conflict--that being overly concerned for the outcome undercut your ability to be effective in the moment. "When my enemy raises his sword, I am already behind him, ready to strike him down" (paraphrasing, sorry) -- there's no need to be concerned about winning because you control the situation before it starts. "The state of continuous victory," to quote from the interview.
In the interview, O-Sensei says there is no attack in Aikido--yet his own demonstrations contain atemi. So he must be talking about the attitude, not the physical action. An attitude of love, while you're throwing uke across the room. And when he gets up, you're both laughing.
When people say his religion doesn't matter to Aikido, I believe they're mostly talking about Ooomoto specifically. Aikido as a spiritual practice is different from O-Sensei's religious background. And don't make too much of mirrors on the shomen--lots of things are carried on as tradition without any commitment to the original meaning.
Similarly for the quotes about being the embodiment of the Kami. Even a Christian might say they were inspired by or filled by the Holy Spirit. It's a great mistake to take religious language as literal language. Religious language is always, at base, poetic--the language of myth.
Blending: The problem with blending is that it's always limited. If uke is in control of their own movement, it doesn't matter whether you blend with it or not--they can choose when to stop or reverse their movement. Same with trying to use uke's momentum. This is why so many Aikido dojos get into attacks where uke throws themselves off balance with their own strike--because we think we're supposed to blend and so we try to make it possible for our partner to do it. If you don't do this in your dojo, good on you. If you do, I'm sorry, but other martial artists are right to laugh at you.
But O-Sensei says you never oppose your opponent's power. Isn't that blending? Well, no, not as it's typically taught. I'm not depending on uke's movement to defeat uke. I'm meeting it--whether it's a fast punch, a static grab, or a pull--and using whatever energy uke put into the attack to make a connection and use that connection to own their balance. Ultimately, this is a ki connection, though you don't have to use that term if you don't find it helpful. But if you do, you can understand how the no-touch throws work--you're making the ki connection before the physical connection and using that to lead their balance. You can see this clearly in O-Sensei's own no-touch throws.
This isn't even surprising, if you understand O-Sensei's own words. You don't oppose uke's force, so you don't put any power into the point where you and uke connect. That being the case, it doesn't actually much matter whether you're even physically touching at that point.
Incidentally, some of O-Sensei's demos make a clear distinction between blending and taking balance. Look for some of the video where O-Sensei meets a shomenuchi by stepping into the strike with a turn that leaves him standing pretty much parallel to uke but with his back to him. There's blending but no balance break, and uke typically stands there with a silly look on his face (notice that O-Sensei's ukes almost never throw themselves off balance). Then, O-Sensei turns the move into an actual technique and shows how he can add a ki connection, take balance, and make an actual technique of it.
Origins of Aikido: As I said upthread, this is a bit of a red herring. In the interview, O-Sensei talks of teaching "Aikido" to Tenryu in Manchuria. This was clearly before the war, therefore before the term "Aikido" was even coined, and while O-Sensei was still teaching Daito-Ryu. Yet O-Sensei says he "knew the secret of 'Aikido'". Clearly, he's not using the term to mean the formal, defined art with a separate syllabus as it existed after the war.
I think he means here the same thing as he means when he says Takeda "opened my eyes to budo"--that Takeda taught him the skills and insights that make budo effective: the aiki skills that Dan is teaching, and that derive from the same source. But he thought those skills were the core and the specific Daito-Ryu techniques were window dressing that could be (and to some degree were) discarded at will.
I would speculate that he was searching for a purer or more immediate expression of those skills, and that what he did in developing Aikido was a paring away of elaborate and technically intricate technique in order to express the core skills more directly--Matisse to Takeda's Picasso. I think he did see cooperative practice and ukemi as important elements of practicing these skills.
What I think he didn't foresee was that the big throws would become so seductive that people would focus on them to the exclusion of the core skills that he knew were required to make his Aikido martially effective. So his students neglected the solo exercises for the flashy throws. So: "This is not my Aikido."
Translations: The best specific example is in the kamae thread. I'm not gonna hunt it--you should have done so already--but the basic story is that O-Sensei wrote or had written in his manual "Budo" a term ("roppo") describing a specific stance. It seemed to mean "open the feet in 6 directions" but the translator (Stevens) didn't know what that meant and asked Saito Sensei, who just said, "Oh, it means hanmi." So Stevens translated it as "stand with your feet at 60 degrees to each other" (paraphrasing throughout, but I have the sense). There were additional passages that he didn't understand at all, and rather than put a bunch of gibberish into his book he just left it out.
But it turns out that "6 directions" is a well-known concept in the internal arts, with a specific meaning. So the translation buried a link to a traditional body of martial knowledge.
Other, similar passages have been cited--e.g. moving in opposing spirals. One passage talked about putting Izanami in your left foot and Izanagi in your right, which is completely baffling if you don't know how Izanami and Izanagi are pictured as spiraling around each other and how spirals are used in martial movement. But when you have all the pieces, they lock together like a jigsaw puzzle, so much so that they self-evidently go together.
Jeez, this is way too long for a forum post. But it's late and my glass is empty, so I'll put it up as is. Anybody who gets through it, I'll buy you a glass of Talisker's if we ever meet.