I finally got around to finding a way to record streanubg audio: not hard.
What you'll need:
Audacity: Good, free and open-source sound editing suite. (Does more than steal sound from the internet.)
Soundflower: Doesn't do much: presents a sort of audio bridge so that you can direct input to a given channel and then record form a given out-bound channel. Very simple.
There are other packages out there that do things a bit "better", but they either aren't free or as flexible.
After you download and install those packages:
1) Start Soundflower. You should see a flower icon up in that "tray" thing near the clock. Don't fuss with it.
2) Start Audacity. First time you need to tell it to record input from the "Soundflower (2ch)" device.
2a) You may want to tell Audacity to "play-through", as in, let you hear stuff as you record it.
3) Open your system->sound preferences and tell it output to "Soundflower (2ch)".
4) Click on that record button.
5) Go to your favorite youtube song and play it. Don't worry about timing, you can edit stuff out later.
6) When it's done press stop and give it some ID3 tags in Audacity if you're into that. Delete the junk at the beginning and end of the scopey looking sound-track.
7) Export it. I recommend Ogg Vorbis, but you can use other formats. If you use that Other Format, you'll allegedly need the LAME encoder package thingy.
8) When you're done exporting you can add it your iPhone/Tunes/Pod/Mac/Life/Work/etc...
Don't forget to change back your audio settings so things...you know...work.
The next how-to or at least how-I-did-it-and-seems-to-work will be on bike painting.