Why there's a limit has been answered on What is the reasoning behind the reputation cap?, Revisiting the rep cap (yes, again) and the questions linked therein. There are a number of reasons:
- It ensures that you can't game the system by having one post that hits the Hot Network Questions list in a day and piles up obscene amounts of reputation, or by posting loads of posts one after another and getting reputation simply through probability.
- It keeps people coming back to the site.
- It forces people to do other things around the site - edit, review, etc. - when they can't gain rep, or go outside, spend time with actual people, or do other normal stuff.
- It means that you need long-term dedication to build up reputation, rather than getting 1,000 points in one UTC day and suddenly having a lot of privileges you don't know how to use. This is Jeff's logic.
- You get addicted through the gamification of wanting to go back the next day. It also combats the addiction by limiting it.
Yes, the reputation vanishes into thin air, never to return. You do, however, gain reputation points from bounties you earn (25-500 apiece), answers of yours which are accepted (15), and answers you accept (2).
Lest you think that I'm biased in favor of the cap, I've missed out on a solid 330 reputation points so far today, by my math, because of it.