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?
My dark side is thinking of a virus, let's call it YouGoToJail, that encrypts a file (say with gunpg - 4mb and works on all OSes) with a random very long password. The virus then deletes all traces to itself. You go to jail!
YouGoToJail indeed.