Google's core business is advertising. We are not the customer; we are the commodity being sold. If google provides hosted storage, they will do so in the same way they provide other services; with full transparency into the user's data. Google wouldn't want to give you storage because it's a nice fuzzy warm company; it would want to give you hosted storage because it can harvest more information out of that to fluff it's own advertising assets or sell to third parties (the actual customers we, the commodity, are sold too).

Now, if Google provided hosted storage only accessible by the end user in the same way that Lastpass and Jungledisk both handle only client side encrypted data? Heck yeah! In that case, Google's got the infrastructure to provide a pretty solid offering. They could even provide a method for users to give Google Apps the password to access the hosted storage. It has to be an opt-in thing though with the default being user data only accessible by the user. This "let us scan your content to help build our targetted advertising database" just won't fly.