I think that would make a great horror RPG, since it's a lot easier to change the rules under the player under those circumstances without anyone making mistakes or screwing things up.

isn't even about psychosis, but existential despair.

I do like that kind of "G-d exists and It is evil" cosmic nihilism and I think it's kind of common in Lovecraft's heirs, but I don't know that it would fit a cosmic horror RPG very well, not least because I think there's enough existential despair in modern life that it wouldn't be a very big difference.