There have been a variety of explanations - academic and folk - for the origin of the sí (pronounced "she"), the fairies of Ireland. Early academic and folk explanations share in their speculative nature, and these speculations can almost never be verified. As is usually the case, it is often possible to cast doubt or to disprove these explanation.

A broad swath of geography shares supernatural beings who are different locally but nevertheless share many attributes. In addition, similar narratives are associated with these entities, which can be found from Ireland to Sweden and Brittany to Iceland (and everyplace between). To maintain that these were all memories of indigenous people would require that a similar pattern of encounter, subjugation, and memory occurred in each of these places, or that a unique Irish tradition spread to all these places.

More likely, there was some belief system that all these places inherited and then later attempted to explain. Ireland has a tradition of successive waves of conquerors arriving on the island, and so it was easy for people to imagine that one of the earliest groups was "remembered" by later arrivals as supernatural beings.

There is a shared tradition that these supernatural beings - sí, elves, fairies, pixies, huldrefolk, trolls (as the word is used in some places and with variations in language), etc. - were associated with ancient people and that they are spiritual remnants of these ancients, too long gone to be seen as individual ghosts the way the newly-dead can appear. That is a folk explanation that draws on a belief in spiritual remnants of the long dead and also on the fact that these entities are often thought to live underground - often in ancient burial mounds. This folk explanation coincided nicely with the Euhemerustic attempt to find an explanation for the entities.

Cahill is drawing on all of this, but his assertion should not be taken seriously.

I would dispute that you would need the existence of displaced indigenous people to account for myths about supernatural beings in any culture. Plenty of people have enough imagination to invent their own mythical creatures without needing a real-life basis for their creations. It is possible that real-life phenomena may have inspired or at least reinforced some myths (e.g. dinosaur bones for dragons and giant squid for kraken), but that doesn't mean it was necessary in all cases.