If they want the key from you, they're going to get the key. That's what will happen.

Ask the inverse: they decide to detain you, indefinitely, until you produce the encryption key or admit that there's some base level of contraband on your computer that you're responsible for. What happens in that case?

Maybe as a Canadian I see this differently. At least as an American you will have certain rights that you can hope to depend on in your own country. But I forfeit all those rights when I cross the border. What's to stop these guys from detaining me as an international terrorist?

Solution: Encrypted data is indistinguishable from random data. Use TrueCrypt (or similar) hidden volumes: http://www.truecrypt.org/docs/?s=hidden-volume

That's NOT a solution. Be aware that this is explicitly discouraged by EFF:

Although TrueCrypt hidden volumes may have some practical applications, we think they are unlikely to be useful in the border search context because they are most helpful when lying to someone about whether there is additional hidden data on a disk. Lying to border agents is not advisable, because it can be a serious crime. [PDF: https://www.eff.org/sites/default/files/filenode/EFF-border-...]

If they suspect there's a hidden volume, that won't help you either.

You can have an arbitrary number of hidden volumes.

If an authority is convinced there's a hidden volume with information they want and that you are not providing access, having arbitrary hidden volumes is not doing you any good legally in the US and likely elsewhere. There are technical and non-technical ways to determine the probable presence of hidden volumes. Hidden volumes do not provide plausible deniability.

Might hidden volumes help you pass a cursory check? Sure. But if someone really wants your data it's not likely going to keep you out of a contempt of court charge.

wonderful thing about encrypted information, with the right key it can be decrypted to say whatever you want. So if government has decided that you have plans for the al Qaeda attack on your laptop... well, you do.

Now all that you have to do is prove that you either don't know or have forgotten the key that decrypts your random bits into a plan they will accept. How hard do you think it will be to convince an aggressive prosecutor/judge that you are innocent when you have no evidence (can't prove a negative) and the government has reasonable suspicion?

Only with a one-time pad?

A small key does not contain enough information to make the data decrypt to any arbitrary thing.