@andi - sorry, I have no experience using loopback files...

@Arafat - ah, it looks like that tutorial already incorporates a
workaround for this fix (i.e. steps 19-21 take care of replacing the
initrd.gz). You should then just be able to insert a USB drive (no
LiveCD needed at this point), boot it and it's supposed to work.

-- 
[hardy] livecd: keyword "persistent" results in busybox and (initramfs)
https://bugs.launchpad.net/bugs/219192
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