The bandwidth and the storage space issues have already been discussed. You cannot get away with it by just saying that storage is cheap... We must abandon this kind of religious thinking where we just hope that storage will get cheaper and network speed bigger just as much as we need.
Off course there are going to be advancements but the pace of such advancements is not goint to allow to cope with the huge increase of the number of transactions.
In any case, as I said before, you can still use direct transactions (but fees are going to be higher).
I find nothing factually wrong with your point of view, but I can't help but feel that your approach to this problem is against the spirit of Bitcoin. Centralized systems requiring trust are generally cheaper to operate than decentralized ones - think for example of modern governments and the deadlock that they often find themselves in - the cost of a centralized system however is in the potential abuse of trust, monopolistic inefficiencies, etc.
The great innovation of Bitcoin is in allowing for a decentralized financial network at a relatively low cost. While you may be right in saying that the economics may not permit small transactions to go on the blockchain, our focus should be to push the limits of the technology to reduce costs, and then let the free market decide what the blocksize should be, rather than chastising people for having "this kind of religious thinking". Centralized payment systems on top of Bitcoin will always exist, it is up to the individual to decide if the cost of giving up autonomy is less than the cost of using Bitcoin directly, however we ought to do all we can to make centralized systems unnecessary.
I'm sorry if the debate on this issue has evolved significantly beyond this, please feel free to point me in the right direction.