As game assets get higher in their quality, so to does the storage needed to accommodate and support those higher quality assets.

Before the console generation even started, I already argued rather heavily it wouldn't amount to much in the way of storage savings.

The issue is that a large portion of game file sizes is due to lossless file types that are not easily compressible, like quality multi-channel audio... The issue is, people would rather listen and fall for marketing.

We don't get a choice. People demand better graphics, then something has to give.

Go back to the Xbox 360/Playstation 3 era and we had drives of around 500GB... Xbox One/Playstation 4 dropped and they came with 500GB drives and eventually moved to 1TB and 2TB.
Playstation 5/Xbox Series X dropped and we are looking at 825GB/1TB and eventually moved to 2TB.

We traded cheaper capacity for faster capacity. - NAND prices are volatile so Sony, Microsoft and Nintendo need to be conservative with storage investment as prices can double fairly rapidly which impact console costs... Which is not the issue we had with mechanical drives.

I have two 16TB mechanical hard drives on my Xbox Series X, I keep all 1000~ or so games installed and updated... As it only takes a few minutes to transfer data from the hard drive to the solid state drive and start playing, where it takes hours to install/download 100GB.
In-fact, I transferred those drives from my Xbox One X, so the data is only additive, just plug and play.

One criticism I have is Microsoft's stupid 16TB per-hard drive cap, original I bought a 20TB drive and even with partitioning it into smaller partitions, the console just wouldn't recognize the drive exists.

ROM doesn't seem to be scaling in capacity much over time.
So Nintendo are starting to use commodity NAND in some carts which is prone to losing data over time, some 3DS/DS carts are already losing data for example.

WiiU's are starting to brick because their internal storage has lost it's data.

BTW. That's a great idea with the mechanical HDD. I'm going to do that to keep my forever titles, instead of spending 180 euro on a good SSD expansion.  

When the next Xbox/Playstation comes out, I can just unplug those drives and plug them into the new console and have my entire game library available and ready to play instantly.

Microsoft and Sony are sticking with the same file/partition formats which makes this all seamless, you just keep bringing your games forwards.

SSD's are great. But they aren't great for long term or cheap mass storage yet... And if they are USB, you still need to do the transfer to main storage anyway.

I'd honestly be more concerned about the development costs leading to these bloated file sizes than the file sizes themselves. This industry is already threatening to collapse under its own weight.

We already know hosting services are getting more expensive over time, imagine ISP's and even devs own hosting space for when their games have to be uploaded to go live, just imagine the inflation of file size within the next 5-10yrs, it's going to get even sillier than it is currently. 

It's already a pain for me having to download even a 10gb patch for a game like Sea of Thieves, where I'm having to wait a few hrs to download it. If I for example, wanted to reinstall GTA V now, I'm looking at a day, maybe a day and a half tops to download, and that's without a net cap. 

I honestly just want cartridges to come back or something similar that isn't a disk drive (I removed mine to remove my old drive bay once I upgraded to SSD's and needed more airflow space, so the disk drive had to go). 

That's a pity. I remember those days. Can you get 5G? That changed digital gaming for me completely, I can download a 42 gig game in just about an hour at the best of times, did it earlier today. It takes longer to get GoW ragnorok to install off the disc than it did that.

Oh and starlink is up to over 5g speeds now for 50 euro a month if you don't have access to proper 5g. 220 Mbs, that's like 40% better. You'd have GTA5 in an hour easy.

For perspective: some 30 years ago I had PC with 40Mb drive and Wing Commander II with expansions took about half of it.
About 20 years ago I had computer with 4+6Gb drives and Myst IV took over 3Gb, third of my total space.
Just saying this isn't a new problem.