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I mean isn't it a (slight) fire hazard?

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Here's a PDF that says: "Bare grounding conductors are wrapped in paper to prevent contact with the insulated conductors." It doesn't say why though. –  Niall C. Dec 9 '13 at 16:28
    
@NiallC. good find, but you're right it doesn't really explain why. I wonder if it is something to do with the insulation sticking to the bare wire. –  ThePopMachine Dec 9 '13 at 16:36
    
The PVC insulation is actually more of a fire hazard and a definite life threat from the toxic smoke. It burns like melted paraffin and gives off toxic gasses. So the fire hazard is actually rather relative. You should be sizing your wire so it doesn't catch fire. –  Fiasco Labs Dec 9 '13 at 17:02
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up vote 2 down vote accepted

From what I can tell, the paper around the bare grounding conductor is simply a separator. Where as the paper wrapped around all the conductors, is there to hold the assembly together while the outer jacket is applied.

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with a bare copper ground wire wrapped in paper and laid parallel between the insulated conductors. The entire assembly is wrapped with a paper separator before applying the PVC outer jacket.

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4.) Separator: A suitable paper wrap, applied over the ground

5.) Assembly: 2 conductors and ground laid parallel and overall paper wrap or 3 and 4 conductors and ground twisted together.

It can have a negative effect, if the cable is exposed to liquid. According to Underwriters Laboratories

In general, cables with PVC insulation and jacket can withstand immersion in clean water for a short period of time without being damaged as long as the ends are not immersed....

If the ends of the cable are immersed for any period of time, however, the internal paper wrapping around the bare equipment-grounding conductor will absorb and transfer the water into the cable assembly. The water may then start degrading the insulation or possibly corrode the conductors. If the cable comes into contact with contaminated water, the contaminants may also act on the insulation or conductors. Over time, failures can occur.

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Paper for flexibility in installation. Plastic doesn't stick to it and allows the wires to move within the sheath. –  Fiasco Labs Dec 9 '13 at 17:04
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