original link: https://web.archive.org/web/20160319050228/http://lesswrong.com/lw/t6/the_cartoon_guide_to_l%C3%B6bs_theorem/
current LW link: https://www.lesswrong.com/posts/ALCnqX6Xx8bpFMZq3/the-cartoon-guide-to-loeb-s-theorem
Translating the puzzle using logic notation
Löb's theorem shows that if 
, then 
.
The deduction theorem says that if 
, then 
.
Applying the deduction theorem to Löb's theorem gives us 
.
When translating to logic notation, it becomes obvious that the application of the deduction theorem is illegitimate, because we don't actually have 
. This is the initial answer that Larry D'Anna gives in comments.
But now, suppose we define 
, and walk through the proof of Löb's theorem for this new theory 
. Then we would obtain the following implication: if 
, then 
. But clearly, 
 since 
 is one of the axioms of 
. Therefore by modus ponens, we have 
, i.e. 
. Now we can apply the deduction theorem to obtain 
. This means that our "Löb's theorem" for 
 must be incorrect (note: the proof is correct for 
, which is why Löb's theorem is a theorem; it's just incorrect for 
), and somewhere in the ten-step proof is an error.
Translating the Löb's theorem back to logic
http://yudkowsky.net/assets/44/LobsTheorem.pdf
Since the solution to the puzzle refers back to the proof of Löb's theorem, we first translate the proof from the cartoon version back to logic:

 

 

 

 

 

 

 

 

 

Repeating the proof of Löb's theorem for modified theory
We now repeat the proof of Löb's theorem for 
 to see where the error is.
 by definition of 
 
 because 
 is one of the axioms of 
 

 

 

 

 

So far, everything is fine. But can we assert 
?