His argument is: 1) They can lock you up for refusing to decrypt something. 2) Encrypted data looks exactly like random noise. 3) Encrypted data can be hidden in any file. 4) Therefore, they can allege that nearly anything is encrypted and lock you up on that basis. I'd say that's terrifying. Another thought: doesn't this make it possible to frame someone by writing random data to their hard drive?
There was a case I read about where someoen was using full disk encryption. He said he gave police his password but it didn't work. The judge dismissed the charges because of the difficulty proving that the key produced wasn't correct but that the hard drive was not corrupt, among other things.