Where does all the excess Resource go?

[Zylithan]

Some of resource is raw materials, but some of it is human capacity. For example, your ironsmith can only make so much armor in a month, etc... That can't be stored up (well, I suppose one could say that you could stockpile empty armor suits, but... you'd have to pay for them ahead of time with gold...)

Resources prevent you from instantly raising huge armies from nonfortified provinces.. which sort of makes sense?

I think that is the role-playing answer, and that your guess that it is a game balance issue is also very true.