Belts and ranks show organization of curriculum in other words, and are signifiers of test results. I agree with MichTKD in that each rank, with its specific goals and requirements, shows what the student is capable of, not only to the teacher but to other students, family and community.
Frequently a white or yellow belt is leery of sparring a black belt so I tell them they are safer with black belts than red belts trying to prove something. But that changes as they gain skills and are tested on them. If I know someone who is a blue belt, can do a spin heel at head level on me because he has tested on that break, that is taken into consideration when sparring.
Also, I have found that having that set of goals over one's head makes you rise to the occasion, train harder, find your true grit. After all it was set up to be learned in increasing increments. First break-yellow-a step sidekick, second-orange-a hopping sidekick until you get to the seven breaks of black belt testing which include power, technique and difficulty. Testing for rank is not for a procrastinator or slacker. Capability-mental or physical-doesn't happen overnight. Beside the instructor has to approve the testing so he knows if a student is ready. And the student has to know that he has trained to his utmost best in preparation.
Ranks/belts are only as good as the school and the instructor giving them out. It is too bad that there are belt mills seemingly downgrading others hard work. Its even bad when some instructors water down their requirements. Its bad when there are politics involved in the testing. It doesn't do anyone a service to give a belt that isn't earned. But we have people in all sizes and shapes ages, weaknesses and strengths, testing and it remains subjective unless it is a result of a neutral testing board not one individual. In the end, we have to trust the instructor/master to tell us whether we earned it or not. And as human beings, we seem to want to know whether we measure up. TW