Usually means paying insincere compliments to feed somebody’s ego, but can also mean misleading statements or outright lying.
It appears that this phrase was developed from ‘blowing smoke.’ The Dictionary of American Slang, (1960) has this entry for the phrase ‘blow smoke’: “To boast, to brag, to exaggerate. Implying that the speaker is having a pleasant dream, as induced by smoking opium, marijuana or hashish.”
‘Smoke’ is the key word, since it has a long association with deception in both English and American slang. Magicians use smoke to hide their actions or to distract the audience, doing it with ‘smoke and mirrors.’ To smoke someone can also mean to mock them, or to expose a deception, as in ‘smoke out.’
One explanation for “blowing smoke” comes from WWI, when British troops would hold a papier-mâché dummy (just a head wearing a tin helmet, on a stick) over the trench parapet to attract the fire of enemy snipers and thus discover their position. For added realism, the fake Tommy would have a cigarette in its mouth, and a soldier crouching below him would blow smoke out of it through a tube.
One rather popular theory is that ‘blowing smoke up someone’s ass’ refers to a procedure once practiced in the premodern era of medicine. Eric Burns, The Smoke of the Gods: A Social History of Tobacco (2007) has this:
“The Aztecs and Incas were among those who practiced the rectal application of tobacco smoke. Where they got the idea, no one can say. Why anyone would endure such a treatment is an even greater puzzle.Nor can he who did the applying have been eager for the business. The Jivaros of eastern Ecuador even tended to their children in this manner, rolling them over onto their sides and anally inserting a syringe that was made of a hen’s bladder.
“As civilization advanced, the use of tobacco enemas declined. But for some reason, tobacco enemas made a comeback in eighteenth century Europe, where they were utilized ‘to resuscitate people in a state of suspended animation, or apparently droned persons.’
“But this…does little to explain why the slang expression ‘blow smoke up someone’s ass’ emerged only in the 1940s or later. My guess is that the historical practice is only coincidentally related to the modern expression.”
A member of a science forum had this to say: “The intestinal walls are built to facilitate osmosis; that’s how they absorb the nutrients in food. For chemicals that don’t need to be broken down by digestion in the stomach, such as drugs, an enema can be a much faster way to get them into the bloodstream than ingestion. An enema with really high-proof liquor will get a person drunk almost instantly. So it’s not unbelievable that in the past enemas were used for all sorts of bizarre purposes.”
The procedure, of course, is not in use today. In 1811, it was discovered that tobacco is toxic to the cardiac system. However, the tobacco enema had a good run during the 18th century, and its usage even spread to treat additional ailments such as typhoid, headache, and stomach cramping.
I couldn’t find any association between smoke and posteriors before WWII, by which time the tobacco bellows would have— or should have—long been forgotten. The second part of the phrase was probably added to the words ‘blow smoke’ by armed forces personnel during the second World War as an insulting intensifier.
There was, however, one similar expression recorded before World War Two. In the [Prescott] Arizona Weekly Journal-Miner (March 14, 1894): “The Gazette has deemed it necessary to state that ‘it is useless to attempt to blow smoke up his spinal column.’
Inside or outside the skin, one wonders?