> Didn't realize that energy could be converted into gravitational waves.

I'll try an explanation, hopefully it's useful to you or another reader.

General Relativity gives us $\nabla_\mu T^{\mu\nu} = 0$, which reads that the covariant derivative of the contravariant stress-energy tensor (the matter tensor) generally vanishes. When remembering the heart of General Relativity: G_{\mu\nu} = T_{\mu nu}, that is, the gravitational interaction arises from moving matter, we observer that changes in the gravitational field match changes in the arrangements and/or motions of matter and vice-versa.

This is a fancy way of saying that there is a global conservation of stress-energy-momentum, even when you work in coordinates or gauges in which there is no global conservation of energy.

For simplicity, here and below I am setting some constants to 1, only considering classical behaviour, completely ignoring strain-squash modes, and otherwise being only very mildly post-Newtonian.

In a system like a rotating barbell with a very thin, almost massless stick, like in a Cavendish apparatus ( http://en.wikipedia.org/wiki/File:Cavendish_Torsion_Balance_... ) the masses on the end of each bar will influence the motions of masses near them, and vice-versa, because their masses attract one another. We are free to choose whatever coordinates we want to describe this sort of setup, including one in which the two grey M balls move in response to the proximity of the two red m balls, with the point where the bar is suspended taken as an origin of some useful coordinates (e.g. spherical polar ones). In particular, as the ms pass close to the Ms, the rotation of the bar is dragged on, and one is free to model that as angular momentum leaving the rotating barbell under a gravitational interaction.

We can treat two massive objects (stars, for example) in a binary orbit as a barbell-like system; the bar itself simply has no mass and is in free-fall rather than suspended on a wire. However, just like in the cavendish experiment, concentrations in the distant mass on either end of the bar will cause the bar to stretch and the system's rotation to slow, while sparsenesses in the distant mass on either end of the bar will cause the bar to contract (the "bar" itself is just the gravitational interaction between the binary masses).

With a clever change of point of view, we may ignore the influence of nonuniformities in the distant masses and just talk about the momentum leaving the rotating system in response to defined (or discovered) changes in the length of the "bar". That momentum is gravitational radiation, and its amplitude and frequency depend on the masses and orbital periods of the ends of the shrinking "invisible bar" of their mutual gravitational interaction. Near the very end of the inspiral, the bar shrinks rapidly, and the amount of angular momentum that is shed is consequently enormous.

Spacetime enters into the picture here via a linerization of the General Relativity picture of inspiralling massive objects: we start by picking out a flat spacetime (\eta [1]) and a field of perturbations on that spacetime (h) and then get the real metric tensor g via g = \eta + h (+ h^2 + h^3 ...). We drop the higher order perturbations on the spacetime (h^2 + h^3 + ...) and have a linear theory that is approximately General Relativity and is very very very close practically everywhere outside of event horizons and the extremely early universe. Gravitational waves are simply excitations in h that obey the massless wave equation.

Spacetime is pretty much meaningless without a measure of lengths and durations between bits of matter, or equivalently, spacetime is the measure (i.e., geometry) of distances in space and time between bits of matter.

Since gravitational waves are waves in an addend of the metric of spacetime, they are equally waves of spacetime.

We can consider a region of spacetime in which we find the "barbell" of merging compact massive objects (black holes, neutron stars) and discuss how, since the momentum of what's inside it decreases as the "bar" shortens, that momentum must flow outside the region to elsewhere. Matter elsewhere in turn picks up some of that momentum, just as the grey M balls pick up some momentum inwards as the red m balls pass near them.

Gravitational waves are seen when one makes some deliberate choices of coordinates and a linearizable approximation of the "real" metric. On that basis it is perfectly reasonable to treat them as physical, even though you could use a very different description the gravitational interactions between the inspiralling bodies and all the other masses in the universe, in a Machian sort of way. The descriptions are to all practical purposes equivalent, and this can be demonstrated mathematically.

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[1] g_\mu\nu, \eta_mu\nu, and h_\mu\nu all have covariant indices, but I'll just stop writing them now because they are distracting. g is a component of G in the G = T mentioned near the top of this comment, where G is the gravitational field and T is all the stress-energy (the non-gravitational fields, or just "matter").