I think it is at that point that your theory starts to break down. If the player in fact simply doesn't realize he's offending you, and has no intention of doing so, and is simply being his dwarven bard, if you turn to him and say, "You are making me really uncomfortable.", I would guess that the odds are better than not that player is going to be hurt and offended and possibly embarassed and possibly therefore angry. This is doubly true if the player isn't sympathetic to your cause of discomfort.
I guess we both have different expectations of people.
The central idea of yours is that you can never inform another person that they are doing something that bothers you without somehow insulting them in the process just doesn't mesh with my experiences. Maybe I just am used to being around more reasonable people.
But if I turn to my friend and say, "Hey, those insults are getting a bit too much for my tastes, could you tone it back?"
I'd expect him to basically see it as a non-event and gladly do so, rather than become angry or embarassed.
Sure, if I approach him in an unreasonable fashion, it might turn out different. If I stop the game and, rather than talk to him about it, instead turn to the DM and other players and say, "Hey, guys, Mike is being a jerk and ruining this game. DM, can you tell him to stop his immature, juvenile, childlike behavior and play the game like a decent human being?"
Then... yeah, I'm guessing he'll be upset. But getting upset simply because someone is honestly telling you how they feel about something you are doing? It's possible, I suppose, but I don't see it as 'more likely than not'.
Now, if the other player isn't sympathetic to the issue? Yeah, there could be a problem. But if you don't say anything at all, then there is a guaranteed problem (one player having the session ruined). Speaking up immediately gives a very good chance of fixing the problem immediately, and at least opens it up to discussion before it is too late.
This is a false extension of the Golden Rule. The Golden Rule is applicable to how you should behave, not how you can expect others to behave to you.
I think you are still too focused on rules here. Either way, I've got an expectation for how I would act and how I would assume my friends would act. If they don't act in this fashion, they aren't going to be sent to jail or anything - I'd probably just lose some respect for them.
I expect most reasonable people to try and avoid behavior that causes distress to their friends. That doesn't mean I can enforce them in doing so or have passed some sort of law requiring it. That's just an expectation I have for how decent people act, myself included. If someone else doesn't live up to that expectation, so be it.
Yeah, because if someone is likely to become more and more resentful over time, it's just assured that if they start a conversation that its going to go swimmingly.
Well, no, not assured... but yes, a situation is much more likely to be defused before tensions start running high.
Say I've got a roommate. I do the dishes the first night. The next night, I figure he will - but he doesn't. I could speak up right away... but no, I don't want to risk insulting him, so I decide to just clean it this night. In fact, I figure if I clean it each night, and do a really good job, eventually he'll realize he's not pitching in and start helping out himself!
Of course, my roommate just assumes that I like doing the dishes, so never bothers helping with them. And so is completely taken by surprise when, a month later, I explode and tear into him for being a filthy disgusing human being that never helps with the chores!
Stiffling your discomfort, or assuming that it will simply get better later, typically just leads to greater tension. Speaking up immediately, when you can simply discuss it calmly and openly and set some ground rules, seems the best approach to me.
And yeah - ideally, you might have set those rules when you decided to be roommates. (Ie, start the campaign). But sometimes an issue comes up that you didn't think to address, and I don't see why it is somehow offlimits to try and discuss the issue when it comes up - before it actually becomes a problem.
But as for this, yes, sometimes it's worth suggesting that you just shouldn't get really upset or uncomfortable over events that happen in-character, especially if the other guy is - as you have painted in him in this case - acting completely innocently and without malice. Sometimes the problem is with you, and at the very least you should be open to that possibility.
Sure, it is a possibility. Or, even more likely, it may just be a misunderstanding - my friend keeps making a comment that I think is an attack on my religion, but no, he's was talking about broccoli, I just misheard him. I've seen stuff like that happen.
That doesn't change the fact that if I do get genuinely upset over something that happens in character, I should speak up about it. If I have decided that yes, this is not a pleasant experience... then I should communicate that fact. Because if it is an accidental thing, then my friend can easily stop and everyone is happy.
And if it isn't accidental, and there is malice behind it... well, maybe we will get a bit of a scuffle at the table. But getting it over with right away is probably better than one player spending the entire session intentionally harassing another player for fun.