The issue can be fixed by dropping the embedded backpacks. However there is a good chance they and all the items in them will be lost. Everything else remained in my inventory though and I was able to keep the outer mountain backpack.

The same thing is happening to me. I can't seem to do much of anything at the moment. I did notice that my ping, desync, etc are reporting 0 for when I log in. At one point an item that I dropped on the ground did appear when I logged out and back in.