Well, to start with, there is no MOODLE_20_STABLE branch (yet). Currently, there is only the master branch. At some point, the MOODLE_20_STABLE will branch off that, but it has not happened yet.
Anyway, for now you want to make your own mylocalmoodle branch off that.
It is not big deal whether you set that up as a tracking branch or not. If it is not a tracking branch, then to do an update, you would have to type:
git merge origin/master (or origin/MOODLE_20_STABLE, once the branch is made.)
Setting it up as a tracking branch is really just a convenience that lets you type git pull instead of those two separate commands. I feeling is that since updating to the latest moodle version is something you would do at most once per week, it is better to type the two commands each time, because it forces you to think about what you are doing.
In terms of what happens when Moodle 2.1 comes out. Well, you don't really have to decide until the times comes. There are basically three approaches.
1. You could try doing it as
git merge origin/MOODLE_21_STABLE
from your mylocalmoodle branch.
2. You could try creating a new branch mylocalmoodle21 that is a new branch on top of MOODLE_21_STABLE. You might be able to do that with rebase:
git checkout -b mylocalmoodle21 mylocalmoodle
git rebase origin/MOODLE_21_STABLE
you will probably end up manually fixing merge conflicts with that.
3. You could do a more manual job of creating a mylocalmoodle21 branch, taking the opportunity to review all the changes you have made, and whether you really want them. git cherry-pick might help automate part of that.
As to which of those is likely to work best, I don't have enough experience to guess yet. At least you know that if you work in git, you are capturing all the information about what you have done, which should maximise your options when 2.1 is released.