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Unfortunately, yes. The turbo is spinning at least 10,000 rpm even at idle. If it hits something like a paper towel or a signifigant amount of water, the turbo wheel usually touches the housing or the bearing gets ground up. Even if the damage isn't immediate, it builds up since the turbo has to be balanced. A damaged wheel will throw it out of balance and over time it will wobble until it finally snaps. Since a diesel can run on engine oil, if it's leaking engine oil it can lead to a runaway and totally destroy the engine. Have you inspected it for damage? A rebuild for journal bearing turbos almost never includes wheels, just bearings and seals.

And don't stick your finger near the wheel unless you don't like your fingers! The cardboard test isn't as good as just getting a cheap boost gauge and tapping the intake and driving. That's the best way to measure boost.

IMO, get a new turbo but the next larger one might not be the right size and will change the engine characteristics. Check out the vwdiesel.net , they deal with the older TD engines alot and would have a better idea of what turbo works. Good luck!
 
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