It will degrade, but probably not noticeably. This is because you've captured the video and encoded it with a lossy compression scheme (MPEG-1). TMPGEnc has to play the video back and reencode it, including any original compression artifacts. But it does a very good job. If you're very concerned by it, see if your video capture utility can save the incoming data in a lossless format. It'll be huge, but only temporary until TMPGEnc can convert it to MPEG.