Well presumably, to get into such a position where it was possible to blow smoke up someone's a$$, you'd have to do an awful lot of fooling. It's not the sort of thing that happens on an everyday basis.
“Men never commit evil so fully and joyfully as when they do it for religious convictions.” – Blaise Pascal
The phrase "blowing smoke", meaning to deceive and/or distract, has been around for years. The "up ones ass" part is a fairly new addition. The origin of the "blowing smoke" part is from stage magic, where magicians use smoke to hide their actions or to distract the audience. So if your actions were meant to distract or deceive, you were said to be blowing smoke.