5'9/5'8 (34" inseam manually measured so not really sure) and riding a fx 7.4 17.5"
 

How bad is it ?
The guy at the bike store said i should be riding a size 20". They did not have my size in the bike i wanted in that size , so i got a 17.5 loner that i will exchange in two weeks for a 20 " for the stock is available .

I tried another bike (fx 7.3) at size 20" and it felt to big for me, and i really prefer the feel of my current bike. Looking at the trek website , 17.5 is about in my range ( at the lower hand of scale) so i really thinking about keeping the 17.5" frame.

The problem is that i am starting to feel some knee pain after two days of biking. I am fairly new at biking so i am not sure if the pain is simply due to me exercise new muscles , or if they are sign of a misfitted bike.

Is there a way to know for sure the cause of the pain ?
Is there some serious long term consequences to riding a bike two small ?
Thanks

Since there's only one hand position and frame size in this model is mostly about top tube length, yes, the wrong size would be a bummer. Knee pain won't have anything to do with frame size, just saddle height, which is adjustable. But yes, if the LBS got it way wrong, could be. A wrong size bike of this sort would be less comfortable, but probably no serious medical consequences.