I wonder if it does actually suffocate them though...it looks hideous but does it actually prevent exchange of gases? I mean in a natural forest you would have a thick layer of leaves and debris around the bases of trees in the fall, right?

Mulch around and touching the trunk keeps it perpetually wet. This can, under the right conditions, encourage fungal and other infections which have at least some potential for killing the tree especially if it is still small. This really has nothing at all to do with suffocation.

The volcanoes may look ridiculous, but far more young trees have been killed by string trimmers than misapplied mulch.