I think you are neglecting to think about the pressure being used. With the smaller contact area of the dremel, when using the same amount of pressure as the grinder, the PSI is through the roof. Let's say you use 1 pound of force using either the dremel or the buffer. Pressing the dremel into the blade with 1lb of force, or holding the blade to the grinder with 1lb of force. In this case of equal pressure, since the grinder contact area is 11.75x (4.7/0.4) GREATER than the dremel, the distributed pressure applied (PSI) is 11.75x LESS when using the grinder. This will generate much less heat using the grinder, assuming the same speed of the wheels and pressure.

My knowledge of the subject sort of ends here, but I think the equations to prove it are relatively linear such that your initial conclusions (not calculations) using 59.47mph and 80.879mph for the dremel and grinder respectively are misleading. If you include the pressure, the numbers would be off by a factor of 11.75 if it's linear. That is, with the dremel at 20,000rpm, with the same pressure as the grinder, even though the wheel speed is slower, you are generating local heat equivalent to running the grinder at (59.47mph * 11.75) = 698.7725mph, or, 29375 rpm.

This whole heat issue gets wayy more complicated when you try to compare the two directly like this, because it's not that simple. You start to get into how much of the blade are you heating and how much is heatsinked by the surrounding metal, etc, etc, none of which I can even begin to understand or explain, let alone prove with equations. So even what I'm saying isn't the end all. For all I know, you're still right because the localized heat generated with the dremel is in such a small area that it is easily heatsinked away by the surrounding metal.

Does this make sense? Please forgive me if I'm overlooking something or just being completely stupid.

Maybe someone else can step in and explain this better. I just think that your equations are technically correct, but your conclusions are misleading. Now if you are talking about using much less pressure with the dremel than with the grinder, 11.75x less that is, then this entire post is moot