The comment from homie is based on a misunderstanding. This isn't about showing or hiding unread posts in a feed; it's about showing or hiding folders and feeds (on the left side) that have unread posts. This is useful if, for example, I want to go back to an (unstarred) article in one of my feeds after I've read all the articles in that feed. It's also especially useful since as far as I can see the only way to assign a feed to a folder is to drag it into that folder on the left side — so if I subscribe to a new feed, I can't put it into a folder that has unread items in it unless I go through the rigamarole of opening up the settings page and changing the setting, then putting the feed in the folder, then re-opening the settings page to change the setting back.

The Old Reader already has the exact thing you've described and it's even better than in Google Reader. Just click "Show all posts" or "Show unread only" on the rightmost part of the screen, just above the feeds. In Google Reader you had to choose from dropdown menu, here the button changes dynamically depending on the current setting.